Dec. 4 (Bloomberg) -- U.S. banks had net income of $37.6 billion in the third quarter, a 6.6 percent increase over the year-earlier period as operating revenue grew the most in almost three years, the Federal Deposit Insurance Corp. said.
Industry profits are the highest in six years, with 57.5 percent of banks reporting gains on earnings that rose from $34.4 billion in the previous quarter, the FDIC said today in its Quarterly Banking Profile. Lenders set aside $14.8 billion for bad loans, and the $22.3 billion in charge-offs showed declines in all categories except residential real estate.
“In previous quarters, we have noted that revenue growth has been very sluggish, and most of the improvement in earnings could be traced to lower provisions for loan losses,” FDIC Chairman Martin Gruenberg said in a briefing on the report. In this latest quarter, “higher revenue contributed more to the increase in earnings than reduced provisions,” he said.
Residential lending was up $14.5 billion amid an overall $64.8 billion industry gain in loan balances led by $31.8 billion more in commercial and industrial loans, the FDIC said.
New York-based JPMorgan Chase & Co., the biggest U.S. bank by assets, said its third-quarter profit grew 34 percent from a year earlier to $5.71 billion, largely on mortgage revenue. Charlotte, North Carolina-based Bank of America Corp., the second-biggest lender, said its income fell 95 percent in the period to $340 million because of litigation expenses and an accounting charge.
Comptroller of the Currency Thomas Curry has cautioned big banks against cutting too far on loss reserves to boost results.
“We share the concern, and it’s a matter of ongoing attention for us,” Gruenberg told reporters today.
The 10 biggest banks lowered reserves by 8.1 percent in the third quarter and industry charge-offs again exceeded what was set aside, according to the FDIC’s report.
“Banks had set aside a lot of money to cover loan losses that never occurred,” American Bankers Association Chief Economist James Chessen said today. “They don’t see loan losses so great in the future that they need those large balances.” The cuts will level off at some point, Chessen said.
Deposits increased by $181.7 billion in the third quarter, from a $61.5 billion rise in the preceding three-month period. Much of the deposit growth was in non-interest-bearing transaction accounts, which are scheduled to lose unlimited FDIC insurance protection on Dec. 31.
“If the Congress allows it to expire at the end of the year, we think the institutions are in a position to manage that in an orderly way,” Gruenberg said.
The American Bankers Association and the Independent Community Bankers of America sent a letter today to senior members of the Senate Banking Committee saying they support a two-year extension of the Transaction Account Guarantee program and that letting it expire would “add more nervousness and uncertainty among our business and municipal customers.”
Much of the industry’s income growth came from sales of loans, with a gain of $3.9 billion. Trading revenue was down 38.9 percent, according to the FDIC report.
Gruenberg said the agency would like to see more income from loans, calling the sustained increase in loan balances “still relatively modest.” Total interest income declined 2.9 percent from the previous quarter, according to the report.
The ABA’s Chessen said the increased loan balances mark a “really powerful” sign of improvement, especially the better health of residential lending.
“Housing has hit a bottom,” Chessen said. “Prices are up. Now you get some new lending taking place where you didn’t have it before.”
The number of lenders on FDIC’s confidential list of so-called problem banks -- those deemed to be at greater risk of collapse -- fell from 732 to 694, the smallest number since a peak of 888 after the 2008 financial crisis. So far this year, 50 banks have failed -- trailing the 90 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 $25.2 billion from $22.7 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 21 percent so far this year.
To contact the reporter on this story: Jesse Hamilton in Washington at email@example.com
To contact the editor responsible for this story: Maura Reynolds at firstname.lastname@example.org