U.S. bank earnings up 21% as loan losses decline

U.S. banks had net income of $34.5 billion in the second quarter, increasing earnings 21% over the year-earlier period on improved asset quality, the Federal Deposit Insurance Corp. said.

Industry profits beat the prior year for a 12th straight quarter, with 89% of banks reporting gains even as earnings declined from $34.8 billion in the previous quarter, the FDIC said today (Aug. 28) in its Quarterly Banking Profile. Lenders set aside $14.2 billion for bad loans, and the $20.5 billion in charge-offs was the lowest quarterly total in more than four years.

Wells Fargo & Co. reported a 17% increase in second-quarter earnings last month, citing strength in mortgage banking and a drop in expenses. In today’s report, the FDIC said residential lending was up $16.6 billion in the quarter, trailing the industry’s $48.9 billion gain from commercial and industrial loans.

“Levels of troubled assets and troubled institutions remain high, but they are continuing to improve,” FDIC Acting Chairman Martin Gruenberg said in a briefing. “After declining in the first quarter, loan balances once again expanded.”

In response to questions about JPMorgan Chase & Co.’s trading losses of at least $5.8 billion reported in July, Gruenberg said they “certainly impacted the results” for the industry and hurt what would have been “a stronger picture.”

Eight of the 10 largest banks put aside lower reserves for loan losses, continuing a nine-quarter decline to a current $86.7 billion, according to the report. That represents a 3.6% drop in reserves for the quarter as charge-offs outpaced the biggest banks’ loss provisions, the agency said.

“There’s been a lot of focus on expense reduction,” said James Chessen, chief economist at the American Bankers Association in Washington. “The loan losses and reserves are really the big drag now. They’re working those down.”

The pace of deposit growth also continued to slow, showing deposits up $61.6 billion in the second quarter, less than the $74.7 billion increase in the previous quarter and $186 billion in the last quarter of 2011.

The number of lenders on FDIC’s confidential list of “problem” banks – those deemed to be at greater risk of collapse – fell for a fifth straight quarter to 732 from 772. So far this year, 40 banks have failed, trailing the 68 failures reached by the same point in 2011.

The deposit insurance fund, which protects customer accounts of as much as $250,000 against bank failures, rose to $22.7 billion from $15.3 billion in the preceding quarter, the FDIC said. The FDIC previously increased bank assessments to replenish the fund, which fell into deficit as the agency resolved hundreds of bank failures stemming from the subprime mortgage crisis.

Investors have pushed the 24-company KBW Bank Index up by more than 19% so far this year.

Chessen said the FDIC report shows banks aren’t recording “the kind of income the industry was earning pre-crisis, but these are still very strong, consistent earnings.” He said the report raises questions: “Will business loan demand stay solid? When will the consumer come back?”

The business loans that have bolstered bank earnings could be slowed by the lack of urgency created as interest rates show no sign of climbing, Chessen said.