Back to top

Image: Bigstock

FDIC-Insured Banks' Q2 Earnings Rise, Asset Quality Concerns Linger

Read MoreHide Full Article

The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported second-quarter 2024 earnings of $71.5 billion, which increased 1.1% year over year.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the June-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 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, JPMorgan has a Zacks Rank #2 (Buy), while Wells Fargo, 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.
 

FDIC
Image Source: FDIC

FDIC-Insured banks’ earnings benefited from a rise in non-interest income and higher rates. Also, sequential growth in loan balance offered support. However, lower net interest income (NII) due to a rise in funding costs, an increase in non-interest expenses and a slight fall in deposit balance were the undermining factors. Further, higher provisions hurt the quarterly performance.

Community banks, constituting 91% of all FDIC-insured institutions, reported a net income of $6.4 billion, down 8.2% year over year. This was mainly due to an increase in non-interest expenses.

The return on average assets in the second quarter of 2024 fell to 1.2% from 1.21% as of June 30, 2023.

FDIC-Insured Banks' Net Operating Revenues Dip, Expenses Up

Net operating revenues came in at $250.7 billion, down almost 1% year over year.

NII was $171.7 billion, decreasing 1.5% year over year. Net interest margin (NIM) was 3.16%, down 12 basis points (bps) and below the pre-pandemic average of 3.25% for the second straight quarter. Several large banks, including JPM, C, BAC and WFC, recorded a contraction in NIM during the reported quarter.

Non-interest income grew 1% to $79 billion.

Total non-interest expenses were $143.9 billion, rising 1.4%.

FDIC-Insured Banks’ Credit Quality Weakens

Net charge-offs (NCOs) for loans and leases were $21.3 billion, surging 44.3% year over year. 

The NCO rate was 0.68% in the second quarter, up 20 bps on the back of a higher credit card charge-off balance. The NCO rate was also well above the pre-pandemic average of 0.48% and touched the highest level since the second quarter of 2013.

Provisions for credit losses were $23.3 billion during the second quarter, up 8.5% on a year-over-year basis. The major concerns remain in commercial real estate loans (mainly office loans) and credit card loans.

Loans Rise, Deposits Fall for FDIC-Insured Banks

As of June 30, 2024, total loans and leases were $12.5 trillion, rising marginally from the prior quarter. The rise was majorly driven by growth in consumer loans. Approximately 75% of banks recorded loan growth, and all major loan categories except construction and development loans witnessed a rise.

Total deposits amounted to $18.8 trillion, down modestly sequentially. Banks with more than $250 billion in assets like JPM, C, BAC and WFC led to the quarterly fall in deposits.

Unrealized losses on securities were $512.9 billion, down nearly 1% from the prior quarter. 

As of June 30, 2024, the Deposit Insurance Fund (DIF) balance increased 3.1% from the March 2024 level to $129.2 billion. A rise in the DIF was largely driven by an assessment income of $3.2 billion.

FDIC-Insured ‘Problem’ Banks Rise

During the reported quarter, no new bank was added, while 29 banks were absorbed following mergers. Further, one bank failed.

As of June 30, 2024, the number of ‘problem’ banks was 66, an increase of 3 from March 2024-end. Total assets of the ‘problem’ institutions increased to $83.4 billion from $82.1 billion reported in the first quarter of 2024.

Parting Thoughts on FDIC-Insured Banks

The FDIC chairman, Martin Gruenberg, said, “The banking industry still faces significant downside risks from uncertainty in the economic outlook, market interest rates, and geopolitical events. In addition, weakness in certain loan portfolios, particularly office properties, credit cards, and multifamily loans, 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, mounting deposit costs continue to exert substantial pressure. This will likely lead to a contraction in NIM despite the Federal Reserve signaling an interest rate cut later this month. Also, a deteriorating macroeconomic environment is expected to hurt banks’ financials.

Published in