Thursday, May 29, 2008

FDIC: bank earnings decline 46 percent in first quarter 2008

FDIC sees banking industry earnings declining by almost 50 percent, with loan loss provisions increasing and troubled loans accumulating (especially in real estate). Loans secured by 1-4 family residential properties declined for the first time since the fourth quarter of 2003, falling by $26.5 billion (1.2 percent). However, the industry still earned a total of $19.3 billion in the first quarter. This is surprising given all the doom and gloom in the forecast. A possible explanation is the fact that the four largest institutions are responsible for more than 50 percent of the shortfall. The restatements in fourth quarter earnings are not encouraging in that sense either.

QBP first quarter 2008:
Real Estate Troubles Hold Down Earnings
Deteriorating asset quality concentrated in real estate loan portfolios continued to take a toll on the earnings performance of many insured institutions in first quarter 2008. Higher loss provisions were the primary reason that industry earnings for the quarter totaled only $19.3 billion, compared to $35.6 billion a year earlier.

Restatements Shrink Fourth Quarter 2007 Profits Substantially
Industry earnings for the fourth quarter of 2007 were previously reported as $5.8 billion, but sizable restatements by a few institutions caused fourth quarter net income to decline to $646 million. This is the lowest quarterly net income for the industry since insured institutions posted an aggregate net loss in the fourth quarter of 1990.

Market-Sensitive Revenues Remain Weak at Large Institutions
In addition to the sharp increase in loan-loss provisions, lower noninterest income also contributed to the decline in industry earnings in the first quarter. Noninterest revenues fell on a year-over-year basis for a second consecutive quarter, declining by $1.7 billion (2.8 percent).

Charge-Off Rate Climbs to Five-Year High
Insured institutions charged-off $19.6 billion (net) during the first quarter, an increase of $11.4 billion (139.1 percent) over the first quarter of 2007. This is the second consecutive quarter of very high net charge-offs -- fourth-quarter charge-offs totaled $16.4 billion. The annualized net charge-off rate in the first quarter rose to 0.99 percent, more than double the 0.45 percent rate of a year earlier and the highest quarterly net charge-off rate since the fourth quarter of 2001.

Noncurrent Loan Growth Remains High
Even with the heightened level of charge-offs, the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) rose by $26.0 billion (23.6 percent) in the first quarter, following a $27.0-billion increase in the fourth quarter of 2007.

Reserve Coverage Loses Ground
However, the growth in loss reserves was outstripped by the rise in noncurrent loans,
and the industry’s “coverage ratio” fell for the eighth consecutive quarter, to 89 cents in reserves for every $1.00 of noncurrent loans from 93 cents at the end of 2007. This is the lowest level for the coverage ratio since the first quarter of 1993.

Growth in Credit Slows
Total loans and leases increased by just $61.4 billion (0.8 percent) during the quarter. Loans secured by real estate rose by $20.5 billion (0.4 percent), the smallest quarterly increase since the first quarter of 2003. Loans secured by 1-4 family residential properties declined for the first time since the fourth quarter of 2003, falling by $26.5 billion (1.2 percent).

click to enlarge

source: Quarterly Banking Profile, First Quarter 2008

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