FDIC: Q2 Interest Margins Lowest Since Q3/89
According to the FDIC’s Q2/14 report, the impact of the rise in medium- and long-term interest rates in Q2/13 remained evident in year- over-year earnings comparisons in Q2/14. The negative effect on noninterest income, particularly income from mortgage lending and from trading, was greater at large banks, while the positive implications of a steeper yield curve for net interest margins, combined with strengthening loan growth, were more significant for smaller institutions.
The FDIC reported that the 6,656 FDIC-insured institutions filing financial results for second quarter 2014 reported combined net income of $40.2 billion. This is $2 billion (5.3%) more than the industry reported in second quarter 2013. Net operating revenue (the sum of net interest income and total noninterest income) was $1.5 billion (0.9%) lower than in second quarter 2013, as a decline in noninterest income from mortgage sales, securitization and servicing outweighed an increase in net interest income.
The regulator said earnings benefited from lower expenses for loan-loss provisions, goodwill impairment, and payrolls. A majority of banks (57.5%) reported year-over-year increases in quarterly earnings, and only 6.8% of banks were unprofitable, down from 8.4% a year ago. This is the lowest proportion of unprofitable institutions since first quarter 2006. The average return on assets for the quarter was 1.07 percent, slightly above the 1.06 percent average in the year- ago quarter.
The FDIC noted that the average net interest margin fell to 3.15% from 3.25% in second quarter 2013. This is the lowest quarterly margin for the industry since third quarter 1989. Margin pressure was most evident at large banks. Nine of the ten largest banks reported lower quarterly margins than a year ago, whereas 55.2% of all banks reported year-over-year margin increases.
Net interest income posted the largest year-over-year increase in 14 quarters, rising by $2 billion (1.9%), as interest-earning assets were 6.4 percent above year-ago levels. Almost 72% of all institutions reported year-over-year growth in quarterly net interest income.
Noninterest income was $3.6 billion (5.3%) lower than a year earlier, as income from sales, securitization, and servicing of 1-to-4 family residential mortgages fell by $3.7 billion (42.5%). Trading income declined for a fourth consecutive quarter, falling by $721 million (10.1%). Reduced expenses outweighed the weakness in revenues compared with the year before.
Banks set aside $6.6 billion in provisions for loan and lease losses during the quarter, a $1.9 billion (22.4%) decline from second quarter 2013 and the lowest quarterly provision total since second quarter 2006. Loan losses declined year over year for a 16th consecutive quarter, falling to $9.9 billion from $14.1 billion in second quarter 2013. This is the lowest quarterly net charge-off total for the industry since second quarter 2007.
To link to the FDIC Q2/14 report, click here.