Sharply higher trading revenues at large banks helped FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009. Realized gains on securities and other assets at a few large institutions also contributed to the quarter’s profits. First quarter earnings were $11.7 billion (60.8 percent) lower than in the first quarter of 2008 but represented a significant recovery from the $36.9 billion net loss the industry reported in the fourth quarter of 2008.1 Provisions for loan and lease losses were lower than in the fourth quarter of 2008 but continued to rise on a year-over-year basis. The increase in loss provisions, higher charges for goodwill impairment, and reduced income from securitization activity were the primary causes of the year-over-year decline in industry net income. Evidence of earnings weakness was widespread in the first quarter; more than one out of every five institutions (21.6 percent) reported a net loss, and almost three out of every five (59.3 percent) reported lower net income than in the first quarter of 2008.
The first part of this overview indicates we've got a statistical blip. "Realized gains at a few large institutions" were the primary reason for the overall jump. The last sentence indicates there are still problems out in the financial sector. 21.6% of all institutions reported a net loss and 59.3% lower year over year results. Those that the figures that should cause us concern.
Insured institutions set aside $60.9 billion in loan loss provisions in the first quarter, an increase of $23.7 billion (63.6 percent) from the first quarter of 2008. Almost two out of every three insured institutions (65.4 percent) increased their loss provisions. Goodwill impairment charges and other intangible asset expenses rose to $7.2 billion from $2.8 billion a year earlier. Against these negative factors, total noninterest income contributed $68.3 billion to pretax earnings, a $7.8-billion (12.8 percent) improvement over the first quarter of 2008. Net interest income was $4.4 billion (4.7 percent) higher, and realized gains on securities and other assets were up by $1.9 billion (152.6 percent). The rebound in noninterest income stemmed primarily from higher trading revenue at a few large banks, but gains on loan sales and increased servicing fees also provided a boost to noninterest revenues. Trading revenues were $7.6 billion higher than a year earlier, servicing fees were up by $2.4 billion, and realized gains on securities and other assets were $1.9 billion higher. Nevertheless, these positive developments were outweighed by the higher expenses for bad loans and goodwill impairment. The average return on assets (ROA) was 0.22 percent, less than half the 0.58 percent registered in the first quarter of 2008 and less than one-fifth the 1.20 percent ROA the industry enjoyed in the first quarter of 2007.
The bottom line: there was some good news. But the bad news outweighed the good news. Loan loss provisions and goodwill impairments are increasing. These factors outweighed the increased revenue from servicing and trading.
For the sixth consecutive quarter, falling interest rates caused declines in both average funding costs and average asset yields. The industry’s average funding cost fell by more than its average asset yield in the quarter, and the quarterly net interest margin (NIM) improved from fourth quarter 2008 and first quarter 2008 levels. The average NIM in the first quarter was 3.39 percent, compared to 3.34 percent in the fourth quarter of 2008 and 3.33 percent in the first quarter of 2008. This is the highest level for the industry NIM since the second quarter of 2006. However, most of the improvement was concentrated among larger institutions; more than half of all institutions (55.4 percent) reported lower NIMs compared to a year earlier, and almost two-thirds (66.0 percent) had lower NIMs than in the fourth quarter of 2008. The average NIM at institutions with less than $1 billion in assets fell from 3.66 percent in the fourth quarter to 3.56 percent, a 21-year low.
The increased net interest margin was better for the bigger banks. Period.
First-quarter net charge-offs of $37.8 billion were slightly lower than the $38.5 billion the industry charged-off in the fourth quarter of 2008, but they were almost twice as high as the $19.6 billion total in the first quarter of 2008. The year-over-year rise in charge-offs was led by loans to commercial and industrial (C&I) borrowers, where charge-offs increased by $4.2 billion (170 percent); by credit cards (up $3.4 billion, or 68.9 percent); by real estate construction loans (up $2.9 billion, or 161.7 percent); and by closed-end 1-4 family residential real estate loans (up $2.7 billion, or 64.9 percent). Net charge-offs in all major categories were higher than a year ago. The annualized net charge-off rate on total loans and leases was 1.94 percent, slightly below the 1.95 percent rate in the fourth quarter of 2008 that is the highest quarterly net charge-off rate in the 25 years that insured institutions have reported these data. Well over half of all insured institutions (58.3 percent) reported year-over-year increases in quarterly charge-offs.
Here is the key takeaway: The annualized net charge-off rate on total loans and leases was 1.94 percent, slightly below the 1.95 percent rate in the fourth quarter of 2008 that is the highest quarterly net charge-off rate in the 25 years that insured institutions have reported these data.
The high level of charge-offs did not stem the growth in noncurrent loans in the first quarter. On the contrary, noncurrent loans and leases increased by $59.2 billion (25.5 percent), the largest quarterly increase in the three years that noncurrent loans have been rising. The percentage of loans and leases that were noncurrent rose from 2.95 percent to 3.76 percent during the quarter; the noncurrent rate is now at the highest level since the second quarter of 1991. The rise in noncurrent loans was led by real estate loans, which accounted for 84 percent of the overall increase. Noncurrent closed-end 1–4 family residential mortgage loans increased by $26.7 billion (28.1 percent), while noncurrent real estate construction loans were up by $10.5 billion (20.3 percent), and noncurrent loans secured by nonfarm nonresidential real estate properties rose by $6.9 billion (40 percent). All major loan categories experienced rising levels of noncurrent loans, and 58 percent of insured institutions reported increases in their noncurrent loans during the quarter.
First loans become non-current, then banks charge them off. In other words wven though banks are charging off a ton of loans, there are more defaults in the pipeline. That is terrible news. In addition, the rate of increase appears to be accelerating. None of this is good.