FDIC’s Gruenberg Warns Banks on Cuts That Gave Record Profit

Federal Deposit Insurance Corp. Chairman Martin Gruenberg warned banks that additional reductions of bad-loan reserves that have helped them post record earnings will warrant regulator scrutiny.

U.S. banks reported net income of $40.3 billion for the first three months of 2013 as they cut expenses, which offset declining interest income, the FDIC said today in its Quarterly Banking Profile. On the heels of the second-most profitable year in industry history, the main driver of earnings has been cutting the reserves for failed loans, according to the report.

“That process has largely played itself out,” Gruenberg said at a news briefing on the report. “Certainly any additional reductions in the reserves is something I think the regulatory agencies are going to be watching very closely.”

Lenders set aside $11 billion for bad loans -- a 23 percent reduction from a year earlier and the lowest level since 2007 -- as the quality of their assets improved, the FDIC said in its report. The quarterly loss from loans was $16 billion, which is the lowest hit since the 2008 credit crisis.

JPMorgan Chase & Co. (JPM), the largest U.S. bank by assets, said in April that loan-loss reserve cuts contributed to its record first-quarter profits -- up $1.6 billion, or 33 percent, to $6.5 billion. The New York-based bank reported it dropped its loss provisions by $1.2 billion and said in a statement that the cuts were expected to continue.

Widespread Profits

Industry profits were widespread with more than 90 percent of banks reporting positive income in the quarter, according to the agency’s report, even as the Federal Reserve’s low interest rate policy continued to squeeze margins. The average net interest margin was at its lowest level in almost eight years, and banks made $2.4 billion less in net income on interest year-over-year, the FDIC said.

Loan balances fell by $36.8 billion for the quarter, led by a 5.2 percent decline in credit-card balances, the FDIC said.

Gruenberg said the industry is “in a stronger position to lend” when weak loan demand improves with the economy and have so far been “doing reasonably well” in the squeezed rate environment. He said that interest margins have forced the firms to search for better yields in ways regulators “are going to have to be very attentive to.”

“Banks’ portfolios have grown stronger as problem loans continue to decline,” said James Chessen, chief economist at the American Bankers Association, in a statement. “Our industry continues to put losses behind it, with most problems now firmly in the rear-view mirror.”

Loan Growth

Chessen said rapid loan growth is “unrealistic” against the headwinds of delayed business borrowing that he attributed to worries about rising health care costs, tax increases and the sluggish economic recovery.

The FDIC’s confidential list of “problem” banks -- those among the more than 7,000 insured institutions deemed to be at greater risk of collapse -- fell to 612 from 651. In the first quarter, four banks failed, which is the smallest number since the second quarter of 2008.

The agency’s deposit insurance fund, which protects customer accounts of as much as $250,000 against bank failures, rose $2.8 billion to $35.7 billion, the FDIC said. Bank assessments were increased 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 (BKX) up 21 percent so far this year.

-- Editors: Anthony Gnoffo, Gregory Mott

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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