Asset Quality Remains Robust, But Bank Net Income Slumps

Tom Burroughes

17 June 2020

COVID-19 and associated suppression methods battered US banks’ profits in the first quarter of 2020, sending them down by almost 70 per cent from a year ago, although asset quality held relatively steady, official figures show.

A report by the Federal Deposit Insurance Corporation, covering 5,116 commercial banks and savings institutions that the FDIC insures, said aggregate net income totaled $18.5 billion in the first quarter of 2020, falling by 69.9 per cent.

Major banks that have wealth management arms, such as JP Morgan, Wells Fargo, UBS, Citigroup, Bank of America and Morgan Stanley, have all shown sharp falls in headline profit caused by a surge in provisions for bad loans caused by the pandemic. Overall, however, it appears that capital buffers remain relatively strong.

"The banking industry has been a source of strength for the economy in the first quarter in spite of unexpected shocks. Although bank earnings were negatively affected by increases in loan loss provisions, banks effectively supported individuals and businesses during this downturn through lending and other critical financial services," FDIC chairman Jelena McWilliams said.

"Notwithstanding these disruptions, at the end of the first quarter, bank capital and liquidity levels remain strong, asset quality metrics are stable, and the number of 'problem banks' remains near historic lows,” she said.

The drop in net income in Q1 was “broad-based”, the FDIC said. Some 55.9 per cent of institutions said net income fell from a year earlier. The share of unprofitable institutions rose from a year ago to 7.3 per cent. The average return on assets ratio fell from 1.35 per cent in first quarter 2019 to 0.38 per cent in first quarter 2020.

Net interest margin declined from a year ago to 3.13 per cent, and the average margin narrowed by 29 basis points from a year ago to 3.13 per cent.

The Deposit Insurance Fund's reserve ratio declined to 1.39 per cent: The Deposit Insurance Fund balance totaled $113.2 billion in the first quarter, an increase of $2.9 billion from the previous quarter. The quarterly increase was led by unrealized gains on available-for-sale securities and assessment income. The reserve ratio declined 2 basis points from fourth quarter 2019 to 1.39 percent, due to the growth in estimated insured deposits.

FDIC said the number of “problem bank” institutions held near “historic lows”. The number of problem banks increased from 51 to 54 during the first quarter, the first quarterly increase since 2011.