By Pete Schroeder
WASHINGTON (Reuters) -U.S. bank profits and deposits were broadly steady in the second quarter, suggesting sector turmoil earlier this year has abated, but regulators are still keeping a close eye on unrealized losses, the Federal Deposit Insurance Corporation said on Thursday.
Overall industry profits in the second quarter fell 11.3% year-on-year to $70.8 billion, driven by the acquisitions of Silicon Valley Bank and two other large lenders which failed from March to May after depositors yanked their cash. Stripping out those rescue deals, profits were up 5.7% from the prior year.
While deposits declined for the fifth quarter in a row, they were down just 0.5% compared with a record 2.5% decline in the first quarter. That was driven by a decline in uninsured deposits, while insured deposits actually rose again in the second quarter by 0.8%.
The quarterly data has become closely watched following this year's crisis, when Federal Reserve interest-rate hikes doused banks' U.S. Treasury securities portfolios, causing unrealized losses which in turn spooked depositors.
Unrealized losses on securities increased 8.3% in the second quarter, rising to $558.4 billion, the FDIC said, although that increase comes after banks had reporting declining unrealized losses for two straight quarters.
"Despite the period of stress earlier this year, the banking industry continues to be resilient," FDIC Chairman Martin Gruenberg said in a statement.
"However, the banking industry still faces significant challenges from the effects of inflation, rising market interest rates and geopolitical uncertainty."
Thursday's results are the first to include the impact of the failure of First Republic Bank (OTC:FRCB), which was seized by regulators in May and sold to JPMorgan Chase (NYSE:JPM).
The FDIC's "problem bank" list was unchanged at 43 firms in the second quarter.
Christopher Wolfe, who oversees Fitch Ratings team covering North American banks, said there was nothing surprising in terms of unrealized losses, adding that the Fed - which has been battling to bring inflation under control - may raise rates one more time.
That could see unrealized losses rise "incrementally," he said. "But most of the pain from rates has already been felt."