Tax Cuts Helped Send Bank Profits Soaring In Q4

WASHINGTON–The nation’s FDIC-insured commercial banks and savings institutions reported aggregate net income of $59.1 billion in the fourth quarter of 2018, up $33.8 billion (133.4%) from one year ago.

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The improvement in net income was led by higher net operating revenue and lower income tax expenses, the FDIC said, releasing the data as part of its Quarterly Banking Profile.

After adjusting fourth quarters 2017 and 2018 to reflect the average effective tax rate prior to the 2017 tax law, the FDIC said the quarterly net income would have been $50.3 billion in fourth quarter 2018, an increase of 18.5% from a year ago.

“Loan balances expanded, net interest margins improved, and the number of ‘problem banks’ continued to decline,” said FDIC Chairman Jelena McWilliams. “Community banks also had a strong quarter, with annual loan growth and a net interest margin that exceeded the overall industry.

“Low interest rates and an increasingly competitive lending environment have led some institutions to reach for yield, and the recent flattening of the yield curve may present new challenges in lending and funding,” McWilliams continued. “Therefore, banks must maintain prudent management of these risks in order to support lending through this economic cycle.”

The Highlights

  • Full-Year 2018 Net Income Increases to $236.7 Billion: The banking industry reported full-year 2018 net income of $236.7 billion, up $72.4 billion (44.1%) from 2017. Adjusted for tax reform effects in the same manner as for quarterly net income, full-year 2018 would have been $207.9 billion, an increase of 13.6% from 2017, FDIC said.
  • Community Banks Net Income Increases 65.1% from a Year Earlier: The 4,979 insured institutions identified as community banks reported net income of $6.8 billion in the fourth quarter, up $2.7 billion (65.1%) from a year ago. Excluding the benefits of a lower effective tax rate, estimated fourth quarter net income would have increased by 11.2% from a year ago. Net operating revenue was up $1.4 billion to $24.3 billion, due to increases in both net interest income and noninterest income, FDIC said. Loan-loss provisions declined 10.4%, and noninterest expenses increased 3.6% compared with a year earlier.
  • Net Interest Income Increases 8.1% from Fourth Quarter 2017: Net interest income totaled $140.2 billion in the fourth quarter, a $10.5 billion (8.1%) increase from a year ago. More than four out of five banks (82.6%) reported an improvement in net interest income from a year ago. The average net interest margin was 3.48% in the fourth quarter, up from 3.31% a year ago.
  • Total Loan and Lease Balances Rise 4.4% Over 12 Months: Total loan and lease balances increased 2.1% from third quarter 2018, reflecting fourth-quarter growth in all major loan categories. Commercial and industrial loans grew by $80.7 billion (3.9%) from the third quarter, and credit card balances, reflecting a seasonal increase in balances, rose by $47.2 billion (5.5%), FDIC said. Over the past 12 months, total loan and lease balances increased by 4.4%, a slight increase from the 4% annual growth rate reported in the third quarter of 2018. Commercial and industrial loans registered the largest dollar increase from a year ago (up $156.2 billion, or 7.8%).
  • Noncurrent Loan Rate and Net Charge-Off Rate Decline: The amount of loans that were noncurrent – 90 days or more past due or in nonaccrual status – decreased by $1 billion (1%) during the fourth quarter. Noncurrent balances for residential mortgages were down $2 billion (4.4%) and commercial and industrial loans were down $554.3 million (3.6%), but noncurrent balances for credit cards were up $1.6 billion (13.8%). The average noncurrent loan rate declined 3 basis points from the third quarter to 0.99%. Net charge-offs declined by $605.9 million (4.6%) from a year ago, as the average net charge-off rate fell from 0.55% to 0.50%.

Other Findings

  • The Number of Banks on the “Problem Bank List” Declined to 60: The FDIC’s Problem Bank List declined from 71 to 60 during the fourth quarter, the lowest number of problem banks since first quarter 2007. Total assets of problem banks declined from $53.3 billion in the third quarter to $48.5 billion. During the fourth quarter, merger transactions absorbed 70 institutions, two new charters were added, and no failures.
  • The Deposit Insurance Fund’s Reserve Ratio Remained at 1.36%: The Deposit Insurance Fund (DIF) balance rose by $2.4 billion from the end of the third quarter to $102.6 billion. The increase was mainly driven by assessment income, unrealized gains, and interest income on securities held by the DIF, FDIC said. The DIF reserve ratio remained unchanged from the third quarter at 1.36% as insured deposits also rose.
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