Aggregate net income for the 25 largest banking companies (25 Largest) declined by 3.1 percent to $14.3 billion during the third quarter of 2002. Net income was 12.2 percent below this year's record first quarter. However, earnings remain strong in an uncertain economic environment.
Third quarter trends reflect weaknesses in the business sector, but are mitigated by the continuing support provided by low interest rates. Net interest margins remained stable, and most of the 25 Largest sold securities to sustain earnings. Decreases in non-interest income and higher loan-loss provisions at some companies reduced aggregate core earnings. The trend in asset quality - as measured by change in nonperforming asset (NPA) volume - has improved or stabilized in most companies. Adverse asset quality trends are not widespread in the 25 Largest and appear to be limited mainly to their corporate sector exposures. Some of the largest companies reported increases in nonperforming telecommunications or cable company-related credits.1 While the consumer sector appears to remain strong, two companies2 noted increases in troubled consumer loans.
The continuing climate of low short-term interest rates and a steep yield curve has been the key to net interest income stability and the maintenance of high margins. Both the federal funds and discount rates remained at record low levels during the quarter. The Federal Reserve has lowered the federal funds rate, the major tool it employs to influence the economy, to 1.25 percent, its lowest level since July 1961. The central bank also lowered the discount rate to 0.75 percent, its lowest recorded level. NIM and funding stability were also bolstered by a second consecutive quarter of two-percent growth in deposits.
Despite the $1.9 billion decline in aggregate net income, 15 of the 25 Largest companies have had earnings increases since the record earnings posted by the group in the first quarter. This indicates that larger losses in a minority of the group are driving aggregate results. The earnings declines of J.P. Morgan Chase ($1.0 billion) and Citigroup ($0.9 billion) account for the entire decrease of the group since its record first quarter.
During the third quarter, net income fell from $14.7 billion to $14.3 billion, but it was still 39 percent higher than the $10.3 billion earned during the third quarter of 2001. Also, 20 of the 25 companies posted higher net income than a year ago.
Return on assets (ROA) of the 25 Largest decreased by 5 basis points in the third quarter to 1.20 percent. Only six companies experienced ROA increases during the quarter, while two were unchanged. However, a comparison of the ratios from the current period to those of the third quarter of 2001 reveals that 18 companies had improved ROAs, with six having increases of more than 30 basis points. While well below the 1.39-percent mark of the first quarter of this year, the 1.20-percent ROA for the quarter is significantly above the 0.89 percent posted in the third quarter of 2001.
Increases in security gains and nonrecurring revenue limit net income decline.
Although net income declined by $400 million, core income3 - a measure of sustainable earnings - declined by a more significant $1.6 billion. Eighteen companies experienced a decline in non-interest income. Net interest income for the group remained unchanged at $36.9 billion and a non-interest expense decrease of $800 million was balanced by an $800 million increase in loan-loss provisions. These developments led to a 10.8 percent decline in core income - a rate of decline that was more than three times that of net income.
The volatility that has characterized the financial
markets throughout the third quarter also affected the earnings of the
. Non-interest income plummeted for the group due to the decline in market-sensitive revenues. Though the decline was widespread, two companies, J.P. Morgan (down $935 million) and Citigroup (down $732 million) combined to account for well over half of the aggregate decrease. Earnings press releases of the 25 Largest mentioned large declines in such non-interest income categories as fiduciary advisory, underwriting and investment banking fees, trading revenue4, losses on equity investments and trust revenue.
Net income was bolstered by a $2 billion increase in non-operating revenue. This revenue boost primarily consisted of a widespread, $1.1-billion jump in security gains (from $200 million to $1.3 billion) and a $600 million rise in nonrecurring revenue5.
Core ROA declined by 15 basis points for the group, with 16 of the companies posting decreases in this measure. Three companies (Comerica, Bank of New York and J.P. Morgan Chase), experienced Core ROA decreases of more than 50 basis points.
Net interest income levels off.
Net interest income totaled $36.9 billion and was unchanged from the second quarter. Meanwhile, net interest margin (NIM) dropped three basis points to 3.71 percent, but remained near its peak of 3.85 percent achieved in the fourth quarter of 2001. Despite the slight third-quarter dip, the NIM of the 25 Largest
remains well above the level it was at year-end 2000 (3.36 percent), the
historic low for the group.
Though the aggregate NIM drop was minimal, it was widespread. A total of 16 companies experienced margin decreases, the largest drop being FleetBoston's 26 basis point decline.
Loan volume rises after two quarters of decline.
On September 30, 2001, loans held by the 25 Largest totaled $2.381 trillion. One year later, loans finally topped that figure, at $2.385 trillion. Loans grew at an annualized six percent rate during the third quarter. Loan increases among the group were widespread, with 17 companies experiencing growth. However, Wells Fargo (up $18.4 billion) and National City (up $8.4 billion), by far, accounted for most of the $35.2 billion aggregate increase for the group. Both of these companies reported that while growth in commercial credits remained stagnant, consumer loan growth continued to be hardy. Much of this robustness can be attributed to home equity and home mortgage products, with mortgage refinancing activity remaining especially strong.
Asset quality trends send mixed signals.
In the third quarter, nonperforming assets increased by $1.426 billion (3.6 percent), while loan-loss reserves only rose by $303 million (0.6 percent). NPAs have grown at a faster pace than loan-loss reserves in nine of the last 10 quarters. This development has caused the ratio of loan-loss reserves to NPAs to fall from 202 percent at the end of the first quarter of 2001 to its current 123 percent.
On an individual company basis, NPAs at J.P. Morgan Chase increased by $1.164 billion, accounting for most of the quarter's aggregate increase. Thus, while the NPAs to assets ratio went up by two basis points (from 0.83 to 0.85 percent), the ratio increased in only 11 of the 23 companies reporting this measure.
In addition to the aggregate NPA increase, net charge-offs (NCOs) were up by $252 million (3.3 percent) in the third quarter. Four companies had NCO increases of more than $100 million, while two had decreases of the same magnitude. J. P. Morgan Chase's NCOs increased $445 million, and FleetBoston's were down $494 million. While the weighted NCOs to average loans ratio went up four basis points (from 1.29 to 1.33 percent), the ratio rose in only 12 of the 25 companies. Aggregate third quarter loan-loss provisions exceeded net charge-offs by $1 billion. On the other hand, the growth rate of loan-loss reserves (0.6 percent) failed to keep pace with that of NPAs (3.5 percent), NCOs (3.3 percent) and loans (1.5 percent).
Noninterest income drop adversely affected efficiency ratio.
Noninterest income drop adversely affects efficiency ratio.
The efficiency ratio measures the proportion of net operating revenues absorbed by overhead expense. During the third quarter the unweighted efficiency ratio of the 25 Largest deteriorated by 196 basis points to 57.31 percent. This is the highest this ratio has been for the group since the fourth quarter of 1998. Moreover, the efficiency ratio increased in 19 of the companies, four (Fifth Third, Charter One, J.P. Morgan Chase and BB&T Corporation) by more than 500 basis points. The driving force behind the ratio's increase was the 9 percent fall in noninterest income, which negated a modest decrease in noninterest expense.
Capital ratios down only slightly.
Total equity capital of the 25 Largest increased by 0.4 percent ($1.3 billion) in the third quarter, while assets increased by 0.7 percent. This caused the equity to assets ratio to fall by one basis point to 7.93 percent.
The increase in equity capital, coupled with the 3.1 percent drop in net income, led to a 61 basis point drop (to 15.04 percent) in the group's return on equity for the quarter.
The unweighted averages of the regulatory capital ratios also fell slightly, but remained near their respective historic high levels. The Total RBC ratio fell the most - by 12 basis points to 12.24 percent - while the Tier 1 RBC and Tier 1 Leverage ratios fell by five and one basis points, respectively. However, for each of the three ratios, only 10 of the 21 reporting companies experienced decreases for the quarter. Three of these companies (Comerica, Fifth Third and UnionBanCal) had declines of 10 basis points or more for all three ratios. Conversely, two companies (PNC and U.S. Bancorp) had increases of 10 basis points or more for all three ratios.
Market capitalization drops in every company.
The 25 Largest were not immune from the recent volatility in the equity markets, as the group's composite price per share fell by 13.5 percent. All 25 companies suffered price declines, with 13 experiencing decreases of 10 percent or more. J.P. Morgan Chase had the most precipitous drop, as its price per share fell 44 percent, while FleetBoston's declined by 37 percent.
The stock price decrease led to a $153 billion (17.4 percent) fall in the group's market capitalization over the quarter. Market capitalization decreased at every company and 16 suffered declines of 10 percent or more. The severity of the decrease in market capitalization of the 25 Largest closely paralleled the sharp declines in other market indices. In the third quarter, the Dow Jones Industrial Average was down by 17.9 percent, the S&P 500 decreased 17.6 percent and the SNL Broad Base Index Value declined by 15.4 percent.
Earnings-per-share figures for nine of the 25 companies exceeded Wall Street's consensus expectations (by a combined 28 cents) for the quarter; three fell short (by a combined 16 cents) and 13 came in as expected.
Merger activity continues.
One significant merger involving the 25 Largest was completed during the quarter. BB&T Corporation finalized its $275-million acquisition of Regional Financial Corporation and First South Bank on September 13. Regional Financial is $1.6 billion thrift holding company based in Florida and First South is a mid-sized thrift institution in Tallahassee, Florida.
Two other notable mergers were announced during the third quarter. In July, Fifth Third Bancorp announced that it was acquiring both Franklin Financial Corporation and Franklin National Bank for $219 million. Franklin Financial is a $768 million bank holding company based in a suburb of Nashville, Tennessee. In September, M&T Bank Corporation announced that it was acquiring Allfirst Financial, Inc. in a deal valued at $2.9 billion. Allfirst, a $17.3 billion bank holding company based in New York, is the U.S. retail operation of Allied Irish Banks, p.l.c.
*This document is based on publicly available information provided by the companies it covers. It is intended
for informational purposes only. It does not represent official policy or supervisory guidance from the FDIC.
The FDIC has assembled information from public data releases compiled by SNL DataSource for the 25 Largest banking companies, as of
October 31, to obtain an early look at the performance of these firms. Highlights are summarized in the narrative below. In addition, attached
tables contain financial data and a merger chronology for each of the25 Largest. Summary indicators for the group are presented on the Data Table for the 25 Largest.
This report only includes organizations primarily involved in commercial banking for which timely information is available. The bank
subsidiaries of these 25 companies hold approximately 61 percent of the commercial banking industry's total assets. Excluded from this report are:
foreign-owned companies, some diversified financial service companies, thrift companies that concentrate on mortgage lending, and nonbank financial
services companies. Further details are presented on the Banks and Thrifts Excluded table.
1J.P. Morgan Chase reported an increase of $1.2 billion in NPAs in the third quarter, which is primarily attributable to loans to cable and telecommunications-related companies. Bank of New York and Citigroup also reported having significant NPA increases stemming from loans made to this sector.