Reductions in loan-loss provisions underscored improvement in asset quality indicators during second quarter 2010. The industry’s quarterly earnings of $21.6 billion are up dramatically from the year-ago loss of $4.4 billion and represent the highest quarterly earnings since third quarter 2007. Almost two out of three institutions (65.5 percent) reported higher year-over-year quarterly net income. The proportion of institutions reporting quarterly net losses remained high at 20 percent but was down from more than 29 percent a year earlier.
Banks are setting aside less money for loan losses -- this is an extremely encouraging development, as it indicates that loan quality is either stabilizing or getting better (we'll get to this later today). The strong year over year comparisons are good and bad; they are good because there was a wide-spread increase, but bad because the YOY comparison is pretty easy to make. The breadth of the increases are a very good sign, although we're still seeing a large number of institutions with some pretty big losses.
Net interest income was $8.5 billion (8.6 percent) higher than a year ago, as more than 70 percent of all institutions reported year-over-year increases. Net interest margins at almost 60 percent of institutions (58.6 percent) improved from a year earlier, as average funding costs fell more rapidly than average asset yields. The magnitude of the increase in net interest income was largely attributable to the application of Financial Accounting Standards Board (FASB) Statements 166 and 167 in 2010 at a small number of institutions with significant levels of securitized consumer loans; among other things, the new rules require that revenues from securitized loan pools that had previously been included in noninterest income be reflected in net interest income.1
One of the primary way banks make money is on the "spread" -- the difference between short and long-term rates. Banks lend money to depositors at short-term rates and make money lon loans which are usually of a longer term. In addition, with the yield curve currently pretty steep, banks are investing short term assets into bonds and pocketing the difference. Either way, the difference between short and long-term assets is an important one for banks. Also note the increase was "largely attributable" to an accounting change that forced banks to add a new asset to their interest bearing assets.
Here are some accompanying graphs.
