Net interest margins dropped to record lows at banks during first quarter, driven mostly by larger institutions

Driven mostly by large institutions, net interest margins at federally insured banks fell to a record low by the end of the first quarter of this year, the federal insurer of bank deposits reported Wednesday, signaling profitability challenges for the institutions.

In releasing first-quarter 2021 performance figures for banks (based on call reports submitted by mid-April), the Federal Deposit Insurance Corp. (FDIC) also said net income was up overall from the end of 2020 – but that was primarily because of negative provisions for credit losses. Meanwhile, the agency reported, loan balances at banks declined from year-end 2020, driven largely by a reduction in credit card balances. Overall, however, the agency said asset quality at banks improved during the first quarter of the year.

Net interest margin (which is gauged by comparing the net interest income a bank earns on loans to the interest it pays savers) is a profitability indicator for a bank. In the first quarter of this year, the FDIC reported, the average net interest margin contracted 57 basis points from the same time a year ago to 2.56% – the lowest level on record as reported by the FDIC. In dollars, that translates to a reduction of $7.6 billion (5.6 percent) from a year ago.

“The year-over-year reduction in yields on earning assets outpaced the decline in average funding costs, both of which are at record lows. Despite the aggregate decline in net interest income, which was driven by the largest institutions, more than three-fifths of all banks (64.4%) reported higher net interest income compared with a year ago,” the agency said.

Meanwhile, the agency also reported that bank net income totaled $76.8 billion at the end of the quarter, an increase of $17.3 billion (29.1%) from the end of 2020. (Community banks, the FDIC noted, reported a 77.5% increase in quarterly net income from a year ago.) However, the agency added that aggregate negative provision expense bolstered both quarterly and annual net income growth. Nevertheless, the number of unprofitable institutions dropped in the first quarter of this year compared to 2020, the FDIC reported.

“Three-fourths of all banks (74.8%) reported annual improvements in quarterly net income, and the share of unprofitable institutions dropped from 7.4% a year ago to 3.9%,” the FDIC said.

Aggregate return on average assets was 1.38%, up 1 percentage point from a year ago and up 28 basis points from fourth quarter 2020, the FDIC said.

The FDIC also reported:

  • Loan volume continued to contract, driven by a reduction in credit card balances (down 7.4%); total loan and lease balances dropped by $38.7 billion (0.4%) from the previous quarter.
  • Asset quality was better, with loans 90 days or more past due or in nonaccrual status (noncurrent loans) declining $5.9 billion (4.6%) from year-end 2020. “The noncurrent rate for total loans declined 5 basis points from the previous quarter to 1.14%,” the agency said. Net charge-offs declined $5.4 billion (36.8%) from a year ago; the total net charge-off rate fell 20 basis points to 0.34%.
  • The FDIC’s Deposit Insurance Fund ratio of reserves to total deposits insured dropped to 1.25%, down four basis points from year-end 2020 – which the agency blamed on strong insured deposit growth. The fund’s reserves actually grew by $1.5 billion during the quarter (to $119.4 billion), the agency pointed out.

FDIC-Insured Institutions Reported Net Income of $76.8 Billion In First Quarter 2021