FDIC-Insured Banks' Q1 Earnings Impress On Robust Revenues

The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported first-quarter 2019 earnings of $60.7 billion, up 8.7% year over year. Notably, community banks, constituting 92% of all FDIC-insured institutions, reported net income of $6.5 billion, up 10.1%.

Banks’ earnings were supported by higher net interest income and controlled expenses. Further, higher loans and net interest margin were tailwinds. Moreover, decline in the number of ‘problem banks’ was a positive. Nonetheless, elevated provisions and fall in fee income were undermining factors.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the recently reported quarter. Though such banks constitute only 1.8% of the total number of domestic banks, these accounted for approximately 80% of the industry’s earnings. Leading names in this space include JPMorgan (NYSE:JPM) , Bank of America (NYSE:C) , Citigroup (NYSE:C) and Comerica (NYSE:CMA) .

All the above mentioned banks carry a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Net Operating Revenues & Margin Improve, Costs Down

Banks have been striving to boost productivity and generate higher profits. More than 62% of all FDIC-insured institutions reported improvement in quarterly net income, while the remaining witnessed a decline from the prior-year quarter level. Additionally, the percentage of institutions reporting net losses in the quarter edged down to 4%.

As of Mar 31, 2019, the measure for profitability or average return on assets inched up to 1.35% from 1.28% recorded as of Mar 31, 2018.

Net operating revenues came in at $204.6 billion, up 3% year over year. A rise in net interest income, partly offset by lower non-interest income, was the driving factor.

Net interest income was $139.3 billion, up 6% year over year, aided by marginal growth in interest-bearing assets and elevated net interest margins (NIM). Notably, around 79% of banks witnessed rise in net interest income.

NIM inched up to 3.42% from 3.32% recorded in the year-earlier quarter, stemming from faster growth in average asset yields than average funding costs.

Non-interest income for the banks declined 3% year over year to $65.4 billion. This decrease was due to lower servicing income and other non-interest income.

Total non-interest expenses for the establishments were $115.3 billion in the quarter, slightly down on a year-over-year basis due to fall in other non-interest expenses, offset by elevated salary and employee benefit expenses.

Credit Quality: A Mixed Bag

Overall, credit quality was a mixed bag in the reported quarter. Net charge-offs increased to $12.7 billion, up 5.5% year over year. Notably, higher credit card charge-offs aided this upside.

In the March-ended quarter, provisions for loan losses for the institutions were $13.9 billion, up 11.8% year over year. The level of non-current loans and leases declined 10.4% to $100.7 billion. The non-current rate was 0.99%.

Strong Loan & Deposit Growth

Capital position of banks remained solid. Total deposits continued to rise and were $13.9 trillion, up 2.9% year over year. Additionally, total loans and leases were $10.1 trillion, jumping 4.1%.

As of Mar 31, 2019, the Deposit Insurance Fund balance increased to $104.9 billion from $95.1 billion as of Mar 31, 2018. Furthermore, interest earned on investment securities primarily supported growth in fund balance, partly offset by lower assessment income.

No Bank Failures, Shrinking ‘Problem’ Institutions, New Charter Added

During the January-March period, none of the banks failed, one new charter was added, while 43 were merged. As of Mar 31, 2019, the number of ‘problem’ banks declined from 60 to 59. This signifies the lowest number reported since first-quarter 2007. Total assets of the ‘problem’ institutions declined to $46.7 billion from $48.5 billion reported in the previous quarter.

Our Viewpoint

Fall in the number of ‘problem’ institutions looks encouraging, with the first quarter witnessing top-line growth on higher net interest income. Banks have been gradually easing their lending standards and trending toward higher fees to counter pressure on the top line. In addition, more interest rate hikes and loan growth will help ease stress on interest income.

Also, continued expense control and stable balance sheets are likely to act as tailwinds in the upcoming quarters. Moreover, with improvement in economy, significant rise in banks’ profitability is expected.

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JPMorgan Chase & Co. (JPM): Free Stock Analysis Report

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