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FDIC-Insured Banks' Q1 Earnings Down on Lower NII, Loan Balance
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The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported first-quarter 2024 earnings of $64.2 billion, declining 19.6% year over year.
Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the March-ended quarter. Though such banks constitute only 3% of the total number of FDIC-insured institutes, these account for approximately 80% of the industry’s earnings. Some of the notable names in this space are JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) .
Banks’ earnings were adversely impacted by lower net interest income (NII) due to a rise in funding costs. Higher non-interest expenses and a slight fall in loan balance were other undermining factors. Nonetheless, a rise in non-interest income, growth in deposit balance, higher interest rates and stable provisions acted as key tailwinds.
Community banks, constituting 91% of all FDIC-insured institutions, reported a net income of $6.3 billion, down 10.9% year over year. This was mainly due to lower NII.
The return on average assets in first-quarter 2024 fell to 1.08% from 1.36% as of Mar 31, 2023.
Net Operating Revenues Down, Expenses Rise
Net operating revenues came in at $249.4 billion, down 4.7% year over year.
NII was $175.2 billion, decreasing 2.4% year over year. Net interest margin (NIM) was 3.17%, down 14 basis points (bps) and below the pre-pandemic average of 3.25%. A large number of banks, including JPM, C, BAC and WFC, recorded a contraction in NIM during the reported quarter.
Non-interest income fell 9.5% to $77.8 billion.
Total non-interest expenses were $147.5 billion, rising 4.3%.
Credit Quality Weak
Net charge-offs (NCOs) for loans and leases were $20.3 billion, surging 63.3% year over year. The NCO rate was 0.65% in the first quarter, up 24 bps from the prior-year quarter on the back of a higher credit card charge-off balance. The NCO rate was also above its pre-pandemic average of 0.48%.
Provisions for credit losses were $20.6 billion during the first quarter, relatively stable on a year-over-year basis. The major concerns remain in commercial real estate loans and credit card loans.
Loans Fall, Deposits Rise
As of Mar 31, 2024, total loans and leases were $12.4 trillion, which declined marginally from the prior quarter. The fall was majorly due to lower credit card and auto loan balances.
Total deposits amounted to $19 trillion, up almost 1% sequentially. This marked the second straight quarterly growth in deposit balance.
Unrealized losses on securities were $516.5 billion, rising 8.2% from the prior quarter.
As of Mar 31, 2024, the Deposit Insurance Fund (DIF) balance increased 2.9% from the December 2023 level to $125.3 billion. A rise in the DIF was largely driven by an assessment income of $3.2 billion.
One New Bank, ‘Problem’ Banks Rise
During the reported quarter, one new bank was added, while 16 banks were absorbed following mergers.
As of Mar 31, 2024, the number of ‘problem’ banks was 63, an increase of 11 from December 2023-end. Total assets of the ‘problem’ institutions increased to $82.1 billion from $66.3 billion reported in the fourth quarter of 2023.
Conclusion
The FDIC chairman, Martin Gruenberg, said, “However, the banking industry still faces significant downside risks from the continued effects of inflation, volatility in market interest rates, and geopolitical uncertainty. In addition, deterioration in certain loan portfolios, particularly office properties and credit cards, continues to warrant monitoring.”
Though higher interest rates, decent loan demand and a changing revenue mix will offer much-needed support to banks’ top line, rising deposit costs will continue to exert substantial pressure on them. This will likely lead to a contraction in NIM. Also, a deteriorating macroeconomic environment is expected to hurt banks’ financials.
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FDIC-Insured Banks' Q1 Earnings Down on Lower NII, Loan Balance
The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported first-quarter 2024 earnings of $64.2 billion, declining 19.6% year over year.
Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the March-ended quarter. Though such banks constitute only 3% of the total number of FDIC-insured institutes, these account for approximately 80% of the industry’s earnings. Some of the notable names in this space are JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) .
At present, Wells Fargo has a Zacks Rank #2 (Buy), while JPMorgan, Bank of America and Citigroup carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Banks’ earnings were adversely impacted by lower net interest income (NII) due to a rise in funding costs. Higher non-interest expenses and a slight fall in loan balance were other undermining factors. Nonetheless, a rise in non-interest income, growth in deposit balance, higher interest rates and stable provisions acted as key tailwinds.
Community banks, constituting 91% of all FDIC-insured institutions, reported a net income of $6.3 billion, down 10.9% year over year. This was mainly due to lower NII.
The return on average assets in first-quarter 2024 fell to 1.08% from 1.36% as of Mar 31, 2023.
Net Operating Revenues Down, Expenses Rise
Net operating revenues came in at $249.4 billion, down 4.7% year over year.
NII was $175.2 billion, decreasing 2.4% year over year. Net interest margin (NIM) was 3.17%, down 14 basis points (bps) and below the pre-pandemic average of 3.25%. A large number of banks, including JPM, C, BAC and WFC, recorded a contraction in NIM during the reported quarter.
Non-interest income fell 9.5% to $77.8 billion.
Total non-interest expenses were $147.5 billion, rising 4.3%.
Credit Quality Weak
Net charge-offs (NCOs) for loans and leases were $20.3 billion, surging 63.3% year over year. The NCO rate was 0.65% in the first quarter, up 24 bps from the prior-year quarter on the back of a higher credit card charge-off balance. The NCO rate was also above its pre-pandemic average of 0.48%.
Provisions for credit losses were $20.6 billion during the first quarter, relatively stable on a year-over-year basis. The major concerns remain in commercial real estate loans and credit card loans.
Loans Fall, Deposits Rise
As of Mar 31, 2024, total loans and leases were $12.4 trillion, which declined marginally from the prior quarter. The fall was majorly due to lower credit card and auto loan balances.
Total deposits amounted to $19 trillion, up almost 1% sequentially. This marked the second straight quarterly growth in deposit balance.
Unrealized losses on securities were $516.5 billion, rising 8.2% from the prior quarter.
As of Mar 31, 2024, the Deposit Insurance Fund (DIF) balance increased 2.9% from the December 2023 level to $125.3 billion. A rise in the DIF was largely driven by an assessment income of $3.2 billion.
One New Bank, ‘Problem’ Banks Rise
During the reported quarter, one new bank was added, while 16 banks were absorbed following mergers.
As of Mar 31, 2024, the number of ‘problem’ banks was 63, an increase of 11 from December 2023-end. Total assets of the ‘problem’ institutions increased to $82.1 billion from $66.3 billion reported in the fourth quarter of 2023.
Conclusion
The FDIC chairman, Martin Gruenberg, said, “However, the banking industry still faces significant downside risks from the continued effects of inflation, volatility in market interest rates, and geopolitical uncertainty. In addition, deterioration in certain loan portfolios, particularly office properties and credit cards, continues to warrant monitoring.”
Though higher interest rates, decent loan demand and a changing revenue mix will offer much-needed support to banks’ top line, rising deposit costs will continue to exert substantial pressure on them. This will likely lead to a contraction in NIM. Also, a deteriorating macroeconomic environment is expected to hurt banks’ financials.