U.S. Banks Neared Record Profit in Second Quarter, FDIC Says

U.S. banks had second-quarter net income of $40.2 billion, the second-highest total on record, as lenders cut expenses and workers to compensate for falling trading revenue, the Federal Deposit Insurance Corp. said.

Loan growth, which returned to levels last seen before the 2008 credit crisis, failed to boost revenue as mortgage servicing and refinancing declined, the FDIC said today in its Quarterly Banking Profile. The report overall showed continuing recovery by the industry, even as banks cope with pressure resulting from slow economic growth, FDIC Chairman Martin Gruenberg said in a briefing in Washington.

“Net income was up, asset quality improved, loan balances grew at their fastest pace since 2007, and loan growth was broad-based,” Gruenberg said. Challenges facing banks include pressure from narrow net interest margins and “increasing higher-risk loans to leveraged commercial borrowers,” he said.

Lending was up for the quarter, with loan and lease balances growing 2.3 percent -- the fastest growth since 2007. Residential mortgages saw a 1.2 percent rise, and the banks saw a 3.1 percent increase in commercial and industrial lending.

Trading income fell a fourth straight quarter, dropping 10.1 percent, the FDIC said.

Loss Reserves

Banks continued bolstering their bottom lines by cutting funds set aside for bad loans, Gruenberg said. Industrywide earnings were boosted as banks set aside the lowest amount of loan-loss reserves in eight years and cut 37,282 employees, according to the report.

Wells Fargo & Co. (WFC) reported a 3.8 percent increase in net income on lower credit costs even as other big banks were a drag on industry revenue. Bank of America Corp, the second-biggest U.S. bank, had a 43 percent decline in profits after spending $4 billion on litigation costs. JPMorgan Chase & Co. (JPM) net income fell 7.9 percent from a year ago.

“Businesses are more confident about lending, banks have the capacity to lend to them, and they’re aggressively trying to do that,” said James Chessen, chief economist at the American Bankers Association. Because banks are “anxious to get money on the street,” Chessen said, they are pressured to give competitive rates -- a point of interest-rate risk being monitored by the FDIC, according to Gruenberg.

The FDIC is also focusing on leveraged lending -- such as in funding for mergers and acquisitions -- and expects the multi-agency Shared National Credit review will highlight the topic next month, Robert Burns, deputy director of the agency’s complex institutions arm, said in a briefing today. The FDIC is discussing possible revisions of lending guidelines the banking regulators released last year, Burns said.

Problem Banks

The number of problem institutions -- those viewed as being at heightened risk of failure -- continued to drop, to 354 from 411 in the preceding quarter, the FDIC said. Seven lenders failed in the second quarter and increasingly banks are emerging from problem status by recovering rather than closing, Gruenberg said.

The agency’s deposit insurance fund, which protects customer accounts of as much as $250,000 against bank failures, rose $2.2 billion to $51.1 billion in the second quarter, the FDIC said. Bank assessments were increased in 2011 to replenish the fund, which fell into deficit as the agency resolved hundreds of failures stemming from the subprime mortgage crisis.

The 24-company KBW Bank Index, which represents national money center banks and leading regional institutions, is up 2.8 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: Lawrence Roberts at lroberts13@bloomberg.net Gregory Mott

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