Lower expenses for troubled loans continued to boost the earnings of insured commercial banks and savings institutions in fourth quarter 2010. The 7,657 institutions filing year-end reports posted quarterly net income of $21.7 billion, a substantial improvement over the $1.8 billion net loss in fourth quarter 2009 and the second-highest quarterly total reported since second quarter 2007. The greatest year-over-year improvement in earnings occurred at the largest banks, but almost two out of every three institutions (62 percent) reported better net income than a year ago. One in four institutions reported a net loss in the fourth quarter, an improvement from a year ago when more than one in three (35 percent) were unprofitable.
At the top line (gross revenue), this report is a good improvement. First, however, note the easy year over year comparison: last year we had a loss and this year we had a strong gain. However, the gain is still impressive. Nearly 66% of all institutions reported an increase in income -- a clear majority and the percentage of institutions reporting a loss decreased.
Insured institutions set aside $31.6 billion in provisions for loan losses in the fourth quarter, almost 50 percent less than the $62.9 billion they set aside a year earlier. This is the smallest quarterly loss provision for the industry since third quarter 2007. Much of the year-over-year reduction in provisions was concentrated among some of the largest banks. Seven large institutions accounted for more than half of the $31.3 billion reduction. However, a majority of insured institutions (54 percent) reduced their provisions in the fourth quarter compared to a year ago.
Again, this is a very good development, as a decrease in loan loss reserves obviously frees up reserves for loans and indicates the overall environment for loans is improving. While the decrease was concentrated in large banks, there are the same banks that had large problems that got us into the recession, so things are obviously improving for them as well.
Revenue Growth Slows
Revenue growth was sluggish in the fourth quarter. Net operating revenue (net interest income plus total noninterest income) was $163.6 billion, only $2.8 billion (1.7 percent) higher than a year earlier and $2.1 billion (1.3 percent) less than in third quarter 2010. This is the second-smallest year-over-year increase in quarterly net operating revenue in the past two years (after the $911 million year-over-year increase in second quarter 2010). Despite the small size of the aggregate increase, revenues were up at almost two-thirds of all institutions (62.4 percent).
Fee Income Declines
Among the notable areas of noninterest revenue weakness, service charge income on deposit accounts at banks filing Call Reports was $2.1 billion (20.7 percent) lower than a year earlier. This is the second consecutive quarter that deposit account fees have declined by 20 percent or more from the prior year. Asset servicing income was $2.2 billion (32.3 percent) lower, and securitization income was down by $1.5 billion (90.7 percent). Both declines were primarily the result of changes in accounting rules that affected financial reporting in 2010. The new accounting rules also were responsible for much of the $7.5 billion (7.5 percent) year-over-year increase in quarterly net interest income. A majority of institutions (59.8 percent) reported higher net interest margins than a year ago, but fourth quarter margins were lower than third quarter margins at 55 percent of institutions.
Full-year 2010 net income totaled $87.5 billion, compared to a revised net loss of $10.6 billion in 2009. This is the highest full-year earnings total for the industry since 2007. More than two out of every three institutions (67.5 percent) reported higher earnings in 2010 than in 2009. The proportion of unprofitable institutions fell from 30.6 percent in 2009 to 21 percent in 2010. This is the first time in six years that the percentage of institutions reporting full-year net losses has declined. The largest factor in the improvement in the industry’s net income was a $92.6 billion (37.1 percent) reduction in loan-loss provisions. The second-largest source of improvement was a $28.7 billion decline in charges for goodwill impairment.2 An additional contribution came from realized gains on securities and other assets, which were $10.8 billion higher. The improvement in full-year earnings was limited by increased income taxes, which were $32.2 billion higher than in 2009. Overall net operating revenue growth was relatively weak in 2010. The $10.8 billion (1.6 percent) increase was the second-worst year-over-year change in the past 16 years, after the $20.4 billion decline registered in 2008. Noninterest income from service charges on deposit accounts was $5.5 billion (13.1 percent) lower than in 2009. This is the first time in the 69 years that these data have been collected that full-year service charge income has declined. Insured institutions paid $53.9 billion in dividends in 2010, an increase of $6.7 billion (14.3 percent) over 2009, but less than half the annual record of $110.3 billion paid in 2007. Retained earnings totaled $33.6 billion, marking the first year since 2006 that the industry as a whole has reported internal capital growth.
Banks improved position is not coming from the revenue side of the equation, but instead a reduction in loan loss provisions. This indicates that banks have been using the last three - five years to heal -- they had a lot of bad loans that they had to account for. As a result, they had to increase loan loss reserves. At the same time, the economy was bad, so there was little to no reason to increase the number of loans they were making.
In short -- the above information indicates the banking sector is healing.
