PRELIMINARY BANK EARNINGS REPORT -- FIRST QUARTER, 2002
BANK EARNINGS RISE TO NEW RECORD OF $21.7 BILLION
NET INTEREST MARGIN IMPROVEMENT AT LARGE BANKS GIVES LIFT TO PROFITS
ASSET-QUALITY WEAKNESSES CONTINUE TO GROW
CONTRACTION IN INDUSTRY'S LOAN PORTFOLIO IS FIRST IN FIVE YEARS
Industry Earnings Surpass $20-Billion Mark For First Time
Wider net interest margins at large banks, combined with slow growth in noninterest expenses, helped propel commercial bank profits to a record $21.7 billion in the first quarter. Banks achieved the record results despite the drag on earnings from rising expenses for loan losses and lower gains on sales of securities. This is the first time that the industry's quarterly earnings have surpassed $20 billion, and easily eclipses the previous record of $19.8 billion, set in the first quarter of last year. While the largest improvements in profitability occurred at large banks, the trend toward improvement was relatively widespread. A majority of banks (55.1 percent) reported higher returns on assets (ROAs) than in the first quarter of 2001, almost two-thirds of all banks (64.0 percent) reported higher net income than a year ago, and only 6.7 percent of all banks reported quarterly losses, compared to 7.0 percent a year earlier. The quarter's ROA of 1.33 percent is the third-highest quarterly ROA ever reported by the industry.
Net Interest Income Growth is Key to Earnings Strength
Net income was $1.9 billion (9.6 percent) higher than a year earlier, largely because of a $6.8-billion (13.1-percent) rise in net interest income. Noninterest income grew by only $1.3 billion (3.3 percent), but this growth outstripped the $1.1-billion (2.0-percent) rise in noninterest expenses. Extraordinary losses were $213 million (64.0 percent) lower than a year ago, giving a boost to pre-tax earnings. Among the items that held down earnings, provisions for loan losses were up by $3.7 billion (46.4 percent), and gains on securities sales were $481 million (41.1 percent) lower than in the first quarter of 2001. Net income from banks' international operations was $584 million (26.4 percent) lower than a year ago.
Market-Sensitive Revenues Exhibit Weakness
Noninterest income was boosted by higher securitization income (up $1.1 billion, or 30.1 percent), increased service charges on deposit accounts (up $867 million, or 14.1 percent), higher servicing fees (up $682 million, or 23.9 percent), and increased gains on loan sales (up $849 million, or 87.5 percent). The 3.3-percent increase in noninterest revenues compared to a year ago was an improvement over the two previous quarters, but was modest by historical standards. Noninterest income growth was slowed by lower market-sensitive revenues, including trading revenues (down $834 million, or 20.9 percent from a year ago), investment banking income (down $103 million, or 4.7 percent), and venture capital revenue (down $101 million, or 73.2 percent). Proceeds from sales of non-loan assets were $1.1 billion lower than in the first quarter of 2001.
Net Interest Margin Reaches Highest Level in More than Four Years
The industry's net interest margin rose to 4.19 percent in the first quarter, from 4.15 percent in the fourth quarter and 3.83 percent in the first quarter of last year. This is the highest margin since the third quarter of 1997. Back then, however, average margins at banks with less than $100 million in assets were more than 50 basis points higher than they are now (4.78 percent, vs. 4.26 percent), while margins at banks with more than $10 billion in assets were almost 30 basis points lower (3.84 percent vs. 4.12 percent). Slightly more than half of all banks (52.1 percent) reported higher margins than a year ago. While the industry's margin has improved in each of the last four quarters, by a total of 36 basis points, the average margin at banks with less than $100 million in assets has remained flat.
C&I Loans, Credit Cards Lead Rise in Loan Losses
Net charge-offs totaled $11.1 billion in the first quarter, down from $12.8 billion in the fourth quarter, but $4.1 billion (59.4 percent) higher than a year ago. Credit-card charge-offs were higher than charge-offs of commercial and industrial (C&I) loans, but losses on credit cards were inflated by one-time charges related to restructurings and loan sales. Losses on commercial and industrial loans continued to increase; C&I charge-offs were $1.2 billion (49.2 percent) above the level of a year ago. Charge-offs of C&I loans to non-U.S. borrowers rose by $243 million (160.9 percent). Charge-offs of credit-card loans jumped sharply in the first quarter, to $4.9 billion, from $3.5 billion in the fourth quarter and $2.6 billion in the first quarter of 2001. Three out of four specialized credit-card lenders registered increases in charge-offs. Consumer loans other than credit cards had a $390-million (36.1-percent) increase in charge-offs, while charge-offs of leases were $144 million (72.9 percent) higher than a year ago. Other loan categories (real estate construction loans, residential mortgages, commercial real estate loans, loans to depository institutions) had modest increases in charge-offs compared to year-earlier levels. Fewer than half of all banks -- 47.4 percent -- reported higher overall net charge-off rates in the first quarter than in the first quarter of 2001.
Noncurrent Loans to non-U.S. Borrowers Increased During the Quarter
Noncurrent loans continued to increase, led by growth in noncurrent C&I loans. Noncurrent C&I loans increased by $1.7 billion during the quarter, representing about three-quarters of the $2.2-billion increase in total noncurrent loans. Non-U.S. C&I customers accounted for $921 million -- more than half -- of this increase. Roughly one out of three banks (31.9 percent ) reported an increase in noncurrent C&I loans during the quarter, but these banks collectively held more than two-thirds (69.5 percent) of the industry's total C&I loans. At the end of March, 2.61 percent of banks' C&I loans were noncurrent, the highest level since the middle of 1993. C&I loans now comprise 44.2 percent of all noncurrent loans at commercial banks, compared to 41.2 percent a year ago and 42.9 percent at the beginning of the quarter. The largest relative increase in noncurrent loans during the quarter occurred in loans to foreign governments and official institutions, which rose from $31 million to $325 million (948 percent), as the noncurrent rate rose from 0.42 percent to 5.08 percent.
Reserves Keep Pace With Noncurrent Loans
Banks' reserves continued to grow strongly during the first quarter, increasing by $2.7 billion, following a $3.9-billion increase in the fourth quarter. The industry's ratio of reserves to loans increased for the sixth consecutive quarter, from 1,85 percent to 1.92 percent. However, the increase in noncurrent loans during the quarter meant that the industry's "coverage ratio" remained unchanged at $1.31 in reserves for every $1.00 of noncurrent loans. Equity capital increased by $7.4 billion, the smallest increase since the third quarter of 1999, but a $64.8-billion decline in commercial bank assets during the quarter helped the industry's equity-to-assets ratio rise from 9.09 percent to 9.30%. Retained earnings fell to $2.2 billion from $6.4 billion a year earlier, as banks paid a record $19.6 billion in dividends in the first quarter.
Loans Decline for First Time in Five Years
The decline in assets in the first quarter was mainly the result of a seasonal decline in balances due from depository institutions at a few large banks, but it received reinforcement from the first quarterly decline in total loans since the first quarter of 1997. A majority of banks had increases in both loans and assets during the quarter. The industry's holdings of C&I loans fell by $15.5 billion during the quarter (including a $9.2-billion decline in loans to non-U.S. borrowers), the fifth consecutive quarter that C&I loans have declined. During this time, C&I loans have dropped by $84.1 billion (8.0 percent). Other loan categories that registered declines during the first quarter include: residential mortgage loans, down $18.0 billion, consumer loans other than credit cards, down $4.8 billion, and agricultural production loans, down $2.7 billion. Growth in construction loans slowed for the fourth quarter in a row. The 0.7-percent increase in the first quarter was the smallest since the fourth quarter of 1994. Mortgage-backed securities increased by a modest $2.4 billion during the quarter, while U.S. Treasury securities ended a string of 11 consecutive quarterly declines, growing by $5.6 billion in the first quarter.
Savings Deposits Continue to Grow Strongly
With lower levels of assets and with equity providing a higher share of funding, total deposits of commercial banks declined by $39.5 billion during the quarter. The share of total asset funding that is provided by deposits remained unchanged at 66.9 percent. Deposits in foreign offices fell by $26.0 billion, while domestic deposits declined by $13.4 billion. In domestic offices, demand deposits declined by $81.1 billion, time deposits fell by $17.2 billion, and savings deposits increased by $84.8 billion.
The number of insured commercial banks reporting financial results declined from 8,080 to 8,005 during the first quarter. There were 16 new charters added during the quarter, while 84 banks were absorbed into other institutions through mergers. Six insured commercial banks failed in the first quarter, the largest number of bank failures in a quarter since the third quarter of 1994. The number of commercial banks on the FDIC's "Problem List" increased from 95 to 102 in the quarter, and assets of "problem" banks rose from $36 billion to $37 billion.