Banks Making Money

In 2008: Q1 - FDIC

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Real Estate Troubles Hold Down Earnings
Deteriorating asset quality concentrated in real estate loan portfolios continued to take a toll on the earnings performance of many insured institutions in first quarter 2008. Higher loss provisions were the primary reason that industry earnings for the quarter totaled only $19.3 billion, compared to $35.6 billion a year earlier. FDIC-insured commercial banks and savings institutions set aside $37.1 billion in loan-loss provisions during the quarter, more than four times the $9.2 billion set aside in first quarter 2007. Provisions absorbed 24 percent of the industry’s net operating revenue (net interest income plus total noninterest income) in the quarter, compared to only 6 percent in the first quarter of 2007.

The average return on assets (ROA) was 0.59 percent, falling from 1.20 percent in first quarter 2007. The first quarter’s ROA is the second-lowest since fourth quarter 1991. The downward trend in profitability was relatively broad: slightly more than half of all insured institutions (50.4 percent) reported year-over-year declines in quarterly earnings. However, the brunt of the earnings decline was borne by larger institutions. Almost two out of every three institutions with more than $10 billion in assets (62.4 percent) reported lower net income in the first quarter, and four large institutions accounted for more than half of the $16.3-billion decline in industry net income.

Restatements Shrink Fourth Quarter 2007 Profits Substantially
Industry earnings for the fourth quarter of 2007 were previously reported as $5.8 billion, but sizable restatements by a few institutions caused fourth quarter net income to decline to $646 million. This is the lowest quarterly net income for the industry since insured institutions posted an aggregate net loss in the fourth quarter of 1990. After the restatements, the fourth quarter 2007 industry ROA was reduced to 0.02 percent. Most of the restatements stemmed from increased charges for goodwill impairment. The writedowns of goodwill reduced the industry’s equity capital, based on Generally Accepted Accounting Principles (GAAP), by approximately $4.7 billion (0.3 percent) from the amount originally reported, but they had no effect on regulatory capital levels, since goodwill is not included in capital for regulatory purposes.

Market-Sensitive Revenues Remain Weak at Large Institutions
In addition to the sharp increase in loan-loss provisions, lower noninterest income also contributed to the decline in industry earnings in the first quarter. Noninterest revenues fell on a year-over-year basis for a second consecutive quarter, declining by $1.7 billion (2.8 percent). Income from trading was $4.8 billion (67.8 percent) lower than in first quarter 2007, while sales of loans yielded $1.7 billion in losses, compared to $2.0 billion in gains a year earlier. Sales of real estate acquired through foreclosure (OREO), which produced $3 million in gains a year ago, resulted in losses of $310 million in the first quarter. Other market-related sources of noninterest income, such as investment banking fees and venture capital revenue, were also lower than a year ago. In contrast, noninterest revenues that were based on transactional activities registered gains. Income from fiduciary activities was up by $867 million (12.7 percent), while income from service charges on deposit accounts rose by $862 million (9.4 percent). Revaluations of certain assets and liabilities under recently adopted fair value accounting1 reduced first quarter noninterest income by $1.2 billion. Fewer than one in three institutions reported year-over-year declines in noninterest income because the weakness in market-sensitive revenues primarily affected large institutions. Noninterest expense growth was relatively benign; total noninterest expense rose by $3.2 billion (3.7 percent) year-over-year. Net interest income was $8.3 billion (9.6 percent) above the level of a year earlier, as interest-earning asset growth remained relatively strong and net interest margins improved slightly at large institutions.

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