September 4, 2015

Higher loan volume powers record bank earnings

Loan balances swelled $185 billion from April to June, helping banks set a record for quarterly revenue.

That was just some of the positive news from the Federal Deposit Insurance Corp.'s review of results from the second quarter. Earnings hit $43 billion, the largest quarterly figure on record, according to FDIC Chairman Martin Gruenberg. Driving the revenue spike were two main factors: increased loan volume and declining non-interest expenses.

"The banking industry had another positive quarter, as recent trends have continued," Gruenberg said on Sept. 2 in an opening statement before taking reporters' questions about the results. "Revenues and earnings were up, loan portfolios grew, asset quality improved, the number of problem banks declined, and only one insured institution failed."

Low interest rates can't hold back revenue gains
Banks saw the largest dollar increase in loans since before the Great Recession (excepting a 2010 spike because of a change in reporting rules). The performance is all the more extraordinary given that it occurred in a seemingly never-ending low interest rate environment, American Banker noted. While recent market fluctuations have clouded the picture, the Federal Reserve is still expected to begin slowly raising benchmark interest rates as 2015 winds down.

Total loans rose 5.4 percent over the second quarter of last year, hitting $8.55 trillion, American Banker highlighted. Strong growth in the auto loan and mortgage categories has played a key role in the expansion. Car loans rose most dramatically in the Chicago, Atlanta and Philadelphia districts of the Federal Reserve.

Compared to the first quarter of 2015, loan balances rose sharply across many categories: 3.1 percent for credit card loans, 2.8 percent for commercial and industrial loans and 1.3 percent for residential mortgages, the Wall Street Journal noted.

The picture isn't all rosy. Vining Sparks analysts, in a survey of community bankers, found that 7 out of 10 think their loan portfolios will grow in 2016. But fewer than 1 in 3 predicted their bank would achieve increased profitability with interest rates still in the cellar and regulatory costs' continued burden. 

Not just quantity - loan quality also improves
The overall quality of the nation's loan pools is also on the upswing, said James Chessen, chief economist for the American Bankers Association.

"We've seen a steady improvement in loan quality over the last five years and that trend should continue," Chessen said. "Delinquent loans and charge-offs are down across the board due to prudent underwriting by banks and determined efforts by both businesses and individuals to keep debt at manageable levels."

Furthermore, Chessen noted, problem loans are down to levels not seen since before the financial crisis, with non-performing loans down to a third their extent in 2010.

American Banker highlighted another key statistic demonstrating the improved quality of loan portfolios: average net charge-off rates fell to 0.42 percent. They haven't been that low since 2006. 

As banks sort out which parts of their loan portfolios to hold on to and which to sell as interest rates are set to finally go back up, experienced third party advisors can help. Any questions or concerns can be discussed with loan sale advisory firm Garnet Capital Advisors.