Good year for banks: Profits up, failures down
WASHINGTON — Banks are ending the year with their best profits since 2006 and fewer failures than at any time since the financial crisis struck in 2008. They're helping support an economy slowed by high unemployment, flat pay, sluggish manufacturing and anxious consumers.
As the economy heals from the worst financial crisis since the Great Depression, more people and businesses are taking out — and repaying — loans.
And for the first time since 2009, banks' earnings growth is being driven by higher revenue — a healthy trend. Banks had previously managed to boost earnings by putting aside less money for possible losses.
Signs of the industry's gains:
• Banks are earning more. In the July-September quarter, the industry's earnings reached $37.6 billion, up from $35.3 billion a year earlier. It was the best showing since the July-September quarter of 2006, long before the financial meltdown. By contrast, at the depth of the Great Recession in the last quarter of 2008, the industry lost $32 billion.
• Banks are lending a bit more freely. The value of loans to consumers rose 3.2 percent in the 12 months that ended Sept. 30 compared with the previous 12 months, according to data from the Federal Deposit Insurance Corp. More lending fuels more consumer spending, which drives about 70 percent of economic activity. At the same time, overall lending remains well below levels considered healthy over the long run.
• Fewer banks are considered at risk of failure. In July through September, the number of banks on the FDIC's confidential “problem list” fell for a sixth straight quarter. These banks numbered 694 as of Sept. 30 — about 9.6 percent of all federally insured banks. At its peak in the first quarter of 2011, the number of troubled banks was 888, or 11.7 percent of all federally insured institutions.
• Bank failures have declined. In 2009, 140 failed. In 2010, more banks failed — 157 — than in any year since the savings and loan crisis of the early 1990s. In 2011, regulators closed 92, including two in eastern Pennsylvania. This year, the number of failures has trickled to 51. That's still more than normal. In a strong economy, an average of only four or five banks close annually. But the sharply reduced pace of closings shows sustained improvement.
• Less threat of loan losses. The money banks had to set aside for possible losses fell 15 percent in the July-September quarter from a year earlier. Loan portfolios have strengthened as more customers have repaid on time. Losses have fallen for nine straight quarters. And the proportion of loans with payments overdue by 90 days or more has dropped for 10 straight quarters.
“We are definitely on the back end of this crisis,” says Josh Siegel, chief executive of Stonecastle Partners, a firm that invests in banks.
The biggest boost for banks is the gradually strengthening economy. Employers added nearly 1.7 million jobs in the first 11 months of 2012. More people employed mean more people and businesses can repay loans. And after better-than-expected economic news last week, some analysts said the economy could end up growing faster in the October-December quarter — and next year — than previously thought.
That assumes Congress and the White House can strike a budget deal to avert the “fiscal cliff” — the steep tax increases and spending cuts that are set to kick in Jan. 1. If they don't reach a deal, those measures would significantly weaken the economy.
Banks have also been bolstered by higher capital, their cushion against risk. Banks boosted capital 3.8 percent in the third quarter, FDIC data show. And the industry's average ratio of capital to assets reached a record high.
On the other hand, many banks are no longer benefiting from record-low interest rates. They still pay almost nothing to depositors and on money borrowed from other banks or the government. But steadily lower rates on loans other than credit cards have reduced how much banks earn.
“This interest-rate pressure on the banks becomes very difficult to overcome,” says Fred Cannon, chief equity strategist and director of research at Keefe, Bruyette & Woods. “It's a big headwind for banks.”
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Retirement planning is about more than just money
- Hospitals, doctors in Pa. received $32M in 5 months from drug, medical device companies
- Education spending helps to widen wealth gap
- Trib 30 index of Pittsburgh-area stocks falls in September
- Google Pittsburgh instrumental in fight against hackers, co-directors say
- EPA says greenhouse gas releases from wells, pipelines decline
- LNG exports get federal approval from Dominion’s Cove Point terminal
- Western Pa. unemployment rate holds steady in August
- Shareholders cheer eBay’s decision to spin off PayPal
- ‘Tug of war’ takes effect on stocks as market logs 3rd monthly drop for 2014
- Study: Wellness programs don't save money, but employee health improves