FDIC-Insured Banks' Q1 Earnings Impressive, Revenues Up

Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported first-quarter 2018 earnings of $56 billion, up 27.5% year over year. Notably, community banks, constituting 92% of all FDIC-insured institutions, reported net income of $6.1 billion, up 17.7% on a year-over-year basis.

Banks’ earnings were driven by higher net operating revenues and a lower effective tax rate. Further, rise in loans and net interest margin were tailwinds. Moreover, decline in number of ‘problem banks’ was a positive. However, higher non-interest expenses and provisions were undermining factors.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the 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 U.S. Bancorp (NYSE:USB) .

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

Net Operating Revenues & Margin Rise, Costs Flare Up

Banks have been striving to gain profits and are boosting productivity. More than 70% 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 declined to 3.9% from 4.3% in the year-ago quarter.

As of Mar 31, 2018, the measure for profitability or average return on assets (ROA) increased to 1.28% from 1.04% recorded as of Mar 31, 2017.

Net operating revenues were $198.7 billion, up 8.2% year over year. A rise in net interest income, as well as non-interest income, was the driving factor.

Net interest income was recorded at $131.3 billion, up 8.5% year over year, driven by rise in net interest income of 85.9% of banks. Net interest margin (NIM) inched up to 3.32% from 3.19% recorded in the year-earlier quarter, stemming from growth in interest-bearing assets. Notably, 69.4% of banks reported rise in NIM.

Non-interest income for the banks climbed 7.9% year over year to $67.4 billion. This upswing was backed by higher trading revenues and other non-interest income.

Total non-interest expenses for the establishments were $115.6 billion in the quarter, up 5.8% on a year-over-year basis, due to rise in other non-interest expenses, and elevated salary and employee-benefit expenses.

Credit Quality: A Concern?

Overall, credit quality was a mixed bag in the reported quarter. Net charge-offs increased to $12.1 billion, up 4.7% year over year. Notably, higher credit card charge-offs aided the upside.

In the reported quarter, provisions for loan losses for the institutions were $12.4 billion, up 3% year over year. The level of non-current loans and leases declined 10% year over year to $112.5 billion. The non-current rate was 1.15%.

Strong Loan & Deposit Growth

The capital position of the banks remained solid. Total deposits continued to rise and were recorded at $13.5 trillion, up 3.4% year over year. Further, total loans and leases were $9.8 trillion, up 4.9% year over year.

As of Mar 31, 2018, the Deposit Insurance Fund (DIF) balance increased to $95.1 billion from $84.9 billion as of Mar 31, 2017. Furthermore, interest earned on investment securities and assessment income primarily supported growth in fund balance.

No Bank Failures, Shrinking Problem Institutions, New Charters Added

During the January-March quarter, none of the banks failed, three new charters were added, while 65 were merged. As of Mar 31, 2018, the number of ‘problem’ banks declined from 95 to 92. This signifies the lowest number since first-quarter 2008. Total assets of the ‘problem’ institutions declined to $56.4 billion from $13.9 billion reported in the prior quarter.

Our Viewpoint

The decline in the number of problem institutions looks encouraging, with the quarter witnessing top-line growth on higher NIM. Banks have been gradually easing lending standards and trending toward higher fees to counter pressure on the top line. In addition, more interest rate hikes will help ease the pressure on interest income. Also, continued expense control and stable balance sheets are likely to act as tailwinds in the upcoming quarters.

What encourages us is that a lot depends on to what extent Trump lives up to his promises. Bank stocks are likely to face the brunt if the promised policy goals are not achieved.

The Fed’s actions on expediting rate hike — which is again a function of economic growth based on Trump’s policy alterations — will also play a key role in keeping the optimism on bank stocks alive.

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