Banks See Setback After Year of Record Profits, FDIC Says

U.S. banks had $37.2 billion in first-quarter net income as mortgage and trading revenue fell, the Federal Deposit Insurance Corp. said in its quarterly report on industry profits.

An earnings slump at JPMorgan Chase & Co. (JPM) and losses at Bank of America Corp. contributed to the decline from a record-setting 2013 that averaged $38.6 billion per quarter. Most big banks saw declines in trading income in the three-month period that ended March 31, while revenue from originating, selling and servicing mortgages fell $4 billion from a year earlier, the FDIC said in the Quarterly Banking Profile released in Washington today.

“Industry revenue has been affected by narrow margins, modest loan growth and a decline in non-interest income as higher interest rates have reduced mortgage-related activity and trading income fell,” FDIC Chairman Martin Gruenberg said at a briefing on the report. On the positive side, he said, loan balances are trending up and more firms are profitable.

The FDIC’s quarterly reports have reflected a slow recovery for banks since the 2008 credit crisis, and the industry’s record profits have relied on cuts to reserves set aside for bad loans. Lenders again bolstered their bottom lines by reducing reserves -- a practice that has been criticized by regulators including Gruenberg. Reserves are at a six-year low, the FDIC said.

Rate Risk

As large banks have increased portfolios of lower-yielding, shorter-term assets, their margins have declined while community banks -- investing over longer periods -- have seen interest margins rise. Reaching for yield has left banks “more vulnerable to interest rate risk as rates rise,” said Gruenberg, who described it as a focus for supervisors.

Loans and leases rose by $37.8 billion, or 0.5 percent, during the quarter. While residential mortgages were down 0.3 percent, other major categories increased, including auto loans and commercial and industrial borrowing. Community banks registered the strongest growth, according to the report.

“It’s not as strong as anybody would like, but trends are upward,” said James Chessen, chief economist at the American Bankers Association, citing record capital levels and strong improvements in asset quality. “The hope now is that business loan demand starts to pick up.”

Problem Banks

The number of problem institutions -- those viewed by regulators as being at heightened risk of failure -- continued to drop, to 411 from 467 in the preceding quarter. Five banks failed in the first quarter, according to the report.

The agency’s deposit insurance fund, which protects customer accounts of as much as $250,000 against bank failures, rose $1.7 billion to $48.9 billion in the first quarter, the FDIC said. Bank assessments were increased in 2011 to replenish the fund, which fell into deficit as the agency resolved hundreds of bank failures stemming from the subprime mortgage crisis.

The 24-company KBW Bank Index (BKX), which represents national money center banks and leading regional institutions, has declined by 0.9 percent this year.

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

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

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