Banks post near-record earnings as sequester looms

By Vicki Needham - 02/26/13 04:46 PM ET

U.S. banks reported near-record earnings last year, the best performance since before the financial crisis crippled the economy in 2008.

Banks posted $141.3 billion in total earnings, a 19.3 percent improvement over 2011 and the second-highest level ever reported by the industry since the $145.2 billion earned in 2006, the Federal Deposit Insurance Corp. (FDIC) reported on Tuesday.

Despite the improvement, the American Bankers Association (ABA) argues that banks will feel the pressure if economic growth is slowed by $85 billion in automatic spending cuts that are set to go into effect on Friday.

"All businesses, including banks, will suffer if the economy slows dramatically because of sequestration," said James Chessen, ABA's chief economist.

"It will increase uncertainty, making businesses more reluctant to borrow and consumers more reluctant to spend."

FDIC Chairman Martin Gruenberg said the nation's slow but steady economic recovery has been a contributing factor to the industry's rebound during the past three years and the sequester could certainly hamper that improvement.

"We're watching it closely," Gruenberg said at a press conference Tuesday.

Because the pace of earnings growth is not likely to continue at this level, Gruenberg said and banks will depend on increased credit by the industry because "troubled loans, problem banks and bank failures remain at elevated levels, while growth in lending and revenue remains sluggish.”

“Going forward, we think the industry earnings are really going to depend on increased credit,” Gruenberg said.

Total loan balances rose $118.2 billion, or 1.6 percent, in the quarter, led by 3.7 percent growth in commercial loans, according to the FDIC.

“There’s not a lot of great opportunities out there at these rates,” Chessen said.

Banks posted a 12 percent growth in year-over-year business lending, and will need to similarly increase consumer lending to bolster revenues, especially if a sequester goes into effect and stymies economic growth.

Chessen said that "even more promising is the broad-based increase in most loan categories, with real estate and auto loans continuing to rise as consumers become more confident in their finances."

In fact, the 18.2 percent year-over-year improvement in noninterest income was driven primarily by higher gains on loan sales, increased trading revenue and reduced losses on sales of foreclosed property.

"Whether businesses continue to seek loans will largely depend on whether there is greater policy certainty surrounding taxes, healthcare costs and government regulations," he said.

Fourth-quarter net income was $34.7 billion, 36.9 percent better than the $25.3 billion in profits the industry reported in the same period in 2011, and it was the highest total for a fourth quarter since 2006.

The total for the three-month period that ended Dec. 31 was a decline from $37.6 billion in the third quarter, the FDIC said.

While Chessen said that "it’s not unusual to see fourth quarter earnings come in below previous quarters, the real story is the 37 percent year-over-year gains, which is a significant uptick in a challenging economic environment."

Overall, 60 percent of banks reported year-over-year improvement in quarterly earnings.

"The banking industry recovery continues but remains a work in progress," Gruenberg said.

Still, he said, "when you look back to where we were just a few years ago, the progress made to date is meaningful."

Bank capital remained near record levels, rising $63 billion last year, putting it at 25 percent higher than 2008 levels.

Total industry capital is now over $1.6 trillion, providing a buffer against any future economic challenges.

The industry also saw a decrease in problem banks — down to 651 from 694 in the fourth quarter, the best showing since 2008.

Deposit growth increased by a record $313.1 billion in the fourth quarter although it was mostly boosted by accounts with large balances, the FDIC said.