Fed’s Duke Says Small Banks Poised for Rise in Profits

Federal Reserve Governor Elizabeth Duke said U.S. community banks are poised to benefit from stronger loan demand and an eventual rise in interest rates as the U.S. expansion gains strength.

Reduced interest income and weak loan demand are “consequences of a sluggish economy,” Duke said today in the text of remarks for a speech in Duluth, Georgia. “As the economic recovery gains momentum, however, both of these conditions should reverse and give bankers the opportunity to deploy the liquidity and capital they have amassed to the benefit of their shareholders and their local economies.”

U.S. banks expect credit quality to rise in 2013 after they eased standards on loans for autos and businesses of all sizes, according to a Fed survey released yesterday. Delinquency rates will probably fall this year for business loans, commercial real estate loans and residential mortgages, the surveyed banks said.

Banking industry profits are the highest in six years, with 57.5 percent of banks reporting gains on earnings, the Federal Deposit Insurance Corp. said Dec. 4 in a quarterly report. The number of lenders on the FDIC’s confidential list of so-called problem banks -- those deemed to be at greater risk of collapse -- fell to 694, the smallest number since a peak after the 2008 financial crisis.

“Credit metrics are now improving in most banks as problem loans have been addressed and resolved and new credit underwriting has been quite restrictive for a number of years,” Duke, a former community banker, said to the Southeastern Bank Management and Directors Conference.

Growth Stalled

Duke didn’t comment on monetary policy in her prepared remarks. She supported the Federal Open Market Committee decision last week to continue buying $85 billion in bonds each month after economic growth stalled last quarter. Policy makers have pushed the benchmark interest rate close to zero and the Fed balance sheet to more than $3 trillion to spur the expansion and reduce unemployment.

The Fed official said she disagreed with community bankers who say small banks may not survive and who see their best options as retirement or sale of banks. Regulators are working to address burdens put on small banks facing “a tsunami of new regulations,” she said.

Duke, 60, was a director at the Richmond Fed from 1998 to 2000. She was appointed a Fed governor by President George W. Bush and took office in August 2008.

Before joining the Fed board, Duke was senior executive vice president and chief operating officer at TowneBank, a Virginia-based community bank. She also served as the first female chairman of the American Bankers Association.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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