A Snapshot of Bank Soundness
Recent reports indicate that banks are on much sounder footing than they were when Lehman Brothers declared bankruptcy four years ago. During this last quarter, nearly two out of every three banks reported higher earnings than a year ago.
Moreover, the U.S. Treasury recently reduced its stake in AIG to 15.9 percent; AIG was one of the largest recipients of Troubled Asset Relief Program (TARP) funds. The reduction in the government’s stake indicates that AIG’s balance sheet is improving, and this seems to be the case with other prominent firms in the financial industry as well. So now is a good time to take a snapshot of the health of a representative sample of banks to understand some trends affecting the banking industry overall. The 10 banks selected represent a peer group of Bank of America, according to the Uniform Bank Performance Report from the FFIEC. Bank of America was one of the first of the large banks to repay its TARP funding in 2010.
The average asset growth rate over the last quarter for the 10 selected banks is 9.57 percent (annualized). This represents an upward trend from last quarter’s annualized growth rate of 5.22 percent for the same group of banks. Though the trend is increasing, growth has not been consistent, falling in the third quarter of 2001, for example. Out of the selected group, Capital One NA saw the largest increase of assets with a 75.91 percent annualized growth rate for the first quarter of this year. Total assets for all banks reporting to the FDIC increased by $105.3 billion, or 0.8 percent, for the second quarter of this year (3.24 percent annualized), according to the FDIC’s Quarterly Banking Profile. A primary driver of the increase in assets comes from the growth of loans.
The growth rate of loans for our selected sample of banks was 16.73 percent (annualized) for the second quarter 2012. This is a large increase from the first-quarter annualized growth rate of 2.42 percent. The trend for loan growth is similar to that of asset growth, which is as expected, since loan and asset growth are positively related. Capital One NA again had the highest growth rate, with annualized loan growth of 113.83 percent, which explains its previously mentioned large increase in assets over the same period. Moving to the industry as a whole, loan balances have increased in four out of the last five quarters.
Total loans and leases, as reported in Call Reports, grew by $102 billion, or 1.4 percent, during the second quarter (5.72 percent annualized). The largest contributing component to this increase was a $48.9 billion, or 3.6 percent (15.20 percent annualized) increase in loans to commercial and industrial borrowers. Residential and credit card balances grew by $16.6 billion, or 0.9 percent (3.65 percent annualized) and $14.7 billion, or 2.3 percent (9.52 percent annualized), respectively, during the second quarter of 2012. Balances of real estate construction and development loans and home equity lines of credit decreased $10.9 billion, or 4.8 percent (20.63 percent annualized) and $10.2 billion, or 1.7 percent (7.00 percent annualized), respectively, but these decreases were not enough to offset the increases from the other components over the same period.
Deposits at the selected sample of banks grew 1.40 percent (annualized) in the second quarter of 2012, compared to 9.18 percent (annualized) in the first quarter. The trend for the deposit growth rate is slightly decreasing over the past 8 quarters. The industry as a whole showed an increase of $61.6 billion, or 0.6 percent (2.42 percent annualized), during the second quarter of 2012.
Digging a little deeper into the composition of the deposits will help explain where this growth came from. The Dodd-Frank Insurance Deposit Provision removed the upper limit on the amount of deposits the FDIC covers for noninterest-bearing accounts. This change took effect on December 31, 2010 (and it will expire December 31, 2012). In line with expectations, there has been an increase in deposits over the previous $250,000 insured limit. Domestic noninterest-bearing deposits increased by $65.6 billion, or 2.9 percent (12.11 percent annualized) from the first to the second quarter of 2012. As the unlimited insurance program approaches expiration, it will be interesting to monitor the amount above the $250,000 limit.
Banks also reduced the amount they set aside for loan losses. In the second quarter of 2012, they set aside $14.2 billion, a $5 billion (26.2 percent) decline from the second quarter 2011 and the smallest quarterly total in five years.
The latest data on asset growth, deposits, and loan loss reserves suggest that overall bank health is slowly on the road to recovery.