Commercial Banks, Savings Institutions Saw Profits Plunge By 70% In Second Quarter, FDIC Says

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corp. saw their aggregate net income plunge by 70% in the second quarter compared to a year ago.

For the 5,066 commercial banks and savings institutions insured by the FDIC, net income totaled $18.8 billion in the second quarter, down from $62.5 billion in the 2019 quarter.

The decline in net income, FDIC said, was a “continuation of uncertain economic conditions, which drove an increase in provision expenses.”

Provisions jumped from $49.1 billion to $61.9 billion in the second quarter. About 47.5% of all institutions reported annual declines in net income.

Also, the average return on assets ratio fell from 1.38% in second quarter 2019 to 0.36%.

As the Federal Reserve lowered interest rates to near zero, the average net interest margin at FDIC-insured institutions fell by 58 basis points from a year ago to 2.81%, the lowest level ever reported.

Net interest income fell by $7.6 billion (or 5.4%) from the second quarter of 2019, marking a third consecutive quarterly decline. The 119-basis point decline in yields on earning assets contributed to the fall in net interest income. About 42.2% of all banks reported annual declines in net interest income.

“Lower levels of business activity and consumer spending – combined with uncertainty about the path of the economy and the low interest-rate environment – contributed to higher provisions for loan and lease losses, as well as a decrease in net interest margins,” said FDIC Chairman Jelena McWilliams. “Notwithstanding these disruptions, however, the banking industry maintained strong capital and liquidity levels at the end of the second quarter, which will protect against potential losses in the future.”

Interestingly, FDIC-insured community banks recorded a 3.2% increase in second quarter net income year-over-year.

The 4,624 FDIC-insured community banks delivered annual net income growth of $202.5 million.

“Despite a 273% increase in provision expenses to $2.4 billion and continued net interest margin compression, more than half of all community banks reported higher net income,” FDIC said. “This increase was primarily attributable to higher revenue from gains on the sale of loans [up $1.4 billion or 142.2%] and gains on the sale of securities [up $299.8 million or 130.7%].” Community banks also reported strong loan growth of 13.5% year-over-year, driven by lending activity related to the Paycheck Protection Program.

“The data show that banks remain a source of strength for the economy during the global pandemic, as the industry not only increased lending in the second quarter but also hiring,” said Rob Strand, senior economist at the American Bankers Association. “The FDIC report also highlights that banks continue to maintain strong capital and liquidity levels despite the economic headwinds.”