FDIC-Insured Banks’ Q1 Earnings Up, NIM & Loan Balance Shrink

FDIC-Insured Banks' Q1 Earnings Up, NIM & Loan Balance Shrink

The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported first-quarter 2021 earnings of $76.8 billion, up substantially year over year. The improvement was largely driven by negative credit costs.

FDIC Chairman Jelena McWilliams said, “Despite continued challenges, the banking industry remains resilient. Strong capital and liquidity levels support lending needs and help protect against potential losses”

Community banks, constituting 91% of all FDIC-insured institutions, reported net income of $8.4 billion, up 73.8% year over year.

Banks’ earnings were driven by a rise in non-interest income, fall in operating expenses and negative provisions. Further, a increase in business activity and consumer spending, along with higher deposit balance, offered some support. In addition, the number of problem banks near historic lows was a tailwind. However, low rates and muted loan demand were major headwinds.

Banks, with assets worth more than $10 billion, accounted for major part of earnings in the March quarter. Though such banks constitute only 3% of the total number of FDIC-insured institutes, these accounted for approximately 80% of the industry’s earnings. Some of the notable names in this space are JPMorgan JPM, Bank of America BAC, Citigroup C, Wells Fargo WFC and Truist Financial TFC.

Currently, Wells Fargo sports a Zacks Rank #1 (Strong Buy), while JPMorgan carries a Zacks Rank of 2 (Buy). Other banks, BofA, Citigroup and Truist Financial carry a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Further, 74.8% of all FDIC-insured institutions reported growth in quarterly net income, while the remaining registered fall from the prior-year level. Also, the percentage of institutions reporting net losses in the quarter fell to 3.9% from the prior year.

Average return on assets in first-quarter 2021 improved to 1.38% from 0.38% as of Mar 31, 2020.

Net Operating Revenues Rise, Costs Down

Net operating revenues came in at $206.473 billion, up 1.1% year over year. The rise was mainly due to higher non-interest income, which was mostly offset by decline in net interest income.

Net interest income (NII) was $129.7 billion, down 5.6% year over year. This was the sixth consecutive quarterly decline in NII. Nonetheless, despite the aggregate decline in NII, more than 64.4% of all banks witnessed a rise in the same from the prior year.

Net interest margin (NIM) contracted 58 basis points (bps) to 2.56%. This was the lowest level on record in the Quarterly Banking Profile. Decline in asset yields more than funding costs on significant increase in low yielding assets resulted in the lowest ever NIM.

Non-interest income grew 14.8% to $76.8 billion. This upside mainly resulted from a rise in net gains on loan sales, servicing fees and trading activities. Notably, 67.9% of all banks recorded annual growth in non-interest income.

Total non-interest expenses were $124.9 billion, decreasing 3.2% from the prior-year quarter. The fall was mainly due to lower amortization expenses of intangible assets.

Credit Quality Mostly Improves

Net charge-offs (NCOs) were $9.2 billion, down 36.9% year over year. The fall was primarily due to lower NCOs for credit cards and commercial and industrial (C&I) loans.

Provisions for credit losses were negative $14.5 billion during the first quarter against provision costs of $52.7 billion in the year-ago quarter. This marked the lowest level on record.

However, the level of non-current loans and leases climbed 20.1% from the year-ago quarter to $122.9 billion. The non-current rate was 1.14%.

Loan Balance Down, Deposits Rise

As of Mar 31, 2021, total loans and leases were $10.8 trillion, falling slightly from the prior quarter. Lower credit card loan balance (down 7.4%) was the main reason for the decline.

Total deposits kept rising throughout the quarter, amounting to $18.5 trillion, up 3.6% sequentially.

As of Mar 31, 2021, the Deposit Insurance Fund (DIF) balance increased marginally from December 2020 level to $119.4 billion. Higher assessment income and interest earned on investment securities largely supported the growth in DIF balance.

No Bank Failures, Three New Banks

During the reported quarter, no banks failed, while three new banks were added. Further, 25 banks were absorbed following mergers.

As of Mar 31, 2021, the number of ‘problem’ banks totaled 55, down by one from the prior quarter. This number is close to historic lows. Total assets of the ‘problem’ institutions fell to $54.2 billion from $55.8 billion reported in the fourth quarter of 2020.

Our Take

Though interest-rate cuts amid coronavirus concerns and faltering loan demand continue to adversely impact banks’ performance, gradual economic revival is expected to offer support. Further, banks have been gradually easing their lending standards and diversifying revenues toward non-interest sources. Thus, these efforts are likely to help counter the pressure on the top line.

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