TROUBLED COMMERCIAL & INDUSTRIAL LOANS CONTINUE TO RISE
Improved Profitability Is Widespread
Continued strength in consumer loan demand, plus a favorable interest-rate environment outweighed the negative effects of weakness in commercial loans for banks in the second quarter of 2002. Commercial banks' earnings rose to $23.4 billion in the second quarter, eclipsing the quarterly earnings record of $21.7 billion that was set in the first quarter by $1.7 billion (7.8 percent). Improved noninterest income, lower provisions for loan losses, increased gains from securities sales, and relatively low growth in noninterest expenses all contributed to the earnings record. Second-quarter earnings were $4.3 billion (22.8 percent) higher than in the same quarter of last year. Net interest income was $5.6 billion (10.5 percent) higher than a year ago, noninterest income was up by $3.6 billion (9.1 percent), and gains from securities sales and other extraordinary items added $480 million (135.6 percent) more to after-tax earnings. While the industry's loan-loss provisions were $696 million (6.0 percent) below the level of the first quarter, they were still $2.0 billion (22.7 percent) more than in the second quarter of 2001, limiting the year-to-year improvement in net income. The average return on assets (ROA) rose to 1.41 percent in the second quarter, matching the all-time high reached in the third quarter of 1999. The industry's ROA was 1.33 percent in the first quarter and 1.21 percent in the second quarter of 2001. Almost two out of every three commercial banks (62.8 percent) reported an ROA of 1 percent or higher in the second quarter, and a similar proportion (62.1 percent) reported a higher quarterly ROA than a year ago.
Diversification Is Evident In Banking Profits
A combination of strength in both transaction-based revenues and market-sensitive revenues contributed to the improvement in noninterest income. Higher securitization income at credit-card lenders, continued growth in service charges on deposit accounts, and increased income from trading activities were the main areas of strength. Income from securitization activities totaled $4.6 billion, an increase of $942 million (25.4 percent) over the second quarter of 2001. Service charges on deposit accounts added $7.5 billion to noninterest revenues, $709 million (10.5 percent) more than a year earlier. Trading revenue was $657 million (24.2 percent) higher. Higher net interest income (up $5.6 billion, or 10.5 percent) was partly the result of wider net interest margins in a more favorable interest-rate environment. The overall low level of interest rates contributed to loan growth, while the steep yield curve helped net interest margins. The industry's net interest margin of 4.11 percent was 8 basis points lower than in the first quarter, but was 21 basis points above the level of 2001's second quarter. After four successive quarters of no improvement, average margins at commercial banks with less than $100 million in assets rose for the first time in two years, increasing by 14 basis points, to 4.40 percent, from 4.26 percent in both the first quarter and in the second quarter of 2001.
Favorable Rate Environment Helps Year-To-Year Comparisons
In the first six months of 2002, commercial banks earned $45.3 billion, a $6.5-billion (16.7 percent) improvement over their performance in the first half of 2001. The industry's six-month ROA was 1.37 percent, up from 1.23 percent a year earlier. A majority of banks - 59.8 percent - reported higher ROAs in the first half of 2002, compared to the same period in 2001, and more than two out of three banks (69.1 percent) reported higher net income. One of the main contributions to the earnings improvement came from net interest income, which was up by $12.8 billion (12.2 percent). A more favorable interest rate environment helped lift net interest margins in the first six months of 2002. The average margin was 4.13 percent, compared to 3.86 percent a year earlier. Increased noninterest income also contributed to the higher earnings. Noninterest revenues were $5.2 billion (6.5 percent) more than in the first half of 2001. Service charges on deposit accounts were up by $1.6 billion (12.2 percent), and securitization income was $2.0 billion (27.5 percent) higher. The improvement in earnings was limited by a $5.6-billion (33.6 percent) increase in provisions for loan losses. More than one-fourth of this increase ($1.6 billion, or 27.5 percent) was attributable to higher provisions for credit losses in banks' foreign operations. Even with these increased credit expenses, net income from international operations was down by only $44 million (1.2 percent), compared to the first half of 2001.
Commercial Loans Still Lead A Rising Trend In Charge-Offs
The quarter's net charge-offs of $10.5 billion were $2.6 billion (32.9 percent) higher than a year earlier. Commercial and industrial (C&I) loans registered the largest increase; charge-offs were up by $1.1 billion (33.5 percent), as net losses on C&I loans to non-U.S. borrowers increased by $405 million (206 percent). Other loan categories had smaller increases in net charge-offs. Credit-card charge-offs were $894 million (31.6 percent) above the level of a year ago, and charge-offs on other consumer loans were $256 million (24.7 percent) higher. Net charge-offs on leases increased by $200 million (89.0 percent).
Credit Quality Of Domestic C&I Loans Shows Positive Signs
Growth in noncurrent loans (loans 90 days or more past due or in nonaccrual status) slowed for the second consecutive quarter. Total noncurrent loans increased by only $1.3 billion, the smallest quarterly increase since the fourth quarter of 1999, and would have declined but for a $1.7-billion (41.2 percent) jump in noncurrent loans to non-U.S. C&I borrowers. Noncurrent loans to domestic C&I borrowers declined for the first time since the second quarter of 1998, falling by $79.4 million (0.4 percent). After rising by $294 million in the first quarter, noncurrent loans to foreign governments and official institutions increased by an additional $119 million (36.5 percent) in the second quarter. The percentage of commercial banks' total loans that were noncurrent remained unchanged at 1.47 percent, marking the first time since the fourth quarter of 1999 that the industry's noncurrent rate did not increase.
Reserves Fall, Equity Grows
Commercial banks' reserves for loan losses fell by $748 million in the second quarter, the first time in three years (since the second quarter of 1999) that reserves have declined. In contrast, equity capital registered fairly robust growth, rising by $19.4 billion (3.2 percent), with retained earnings and accumulated comprehensive income1 contributing almost equal shares ($9.3 billion and $9.7 billion, respectively) of the increase. A substantial increase in assets caused the industry's equity-capital-to-assets ratio to dip slightly during the quarter, from the 61-year high of 9.30 percent to 9.25 percent.
Surge In Refinancing Helps Propel Industry Growth
Total assets increased by $245.1 billion (3.8 percent) in the second quarter, after declining by $64.8 billion in the first quarter. This is the largest quarterly increase in industry assets on record, surpassing the $222.1-billion increase posted by the industry in the fourth quarter of 1999. Total loans and leases grew by $78.3 billion (2.0 percent) during the quarter. Assets in trading accounts increased by $66.4 billion (21.1 percent), as revaluation gains grew by $35.1 billion. Foreign office assets increased by $71.3 billion (9.7 percent). Reflecting the continued strength in mortgage refinancing activity, banks' holdings of mortgage-backed securities increased by $45.4 billion (7.4 percent), while their residential mortgage loans rose by $30.5 billion (3.8 percent). During the 12 months ending June 30, commercial banks' mortgage-backed securities grew by $152.7 billion (30.0 percent). Home equity loans continued to exhibit strong growth, rising by $21.8 billion (13.1 percent) in the quarter. C&I loans declined for the sixth consecutive quarter, falling by $27.5 billion (2.9 percent). The industry's C&I loan portfolio is now $113.2 billion (10.8 percent) below its peak level at the end of 2000. Annual data on C&I loans to small businesses show that during the 12 months ending June 30, these loans increased by $7.7 billion (3.2 percent), while larger C&I loans fell by $96.8 billion (12.3 percent).
Savings Deposit Growth Slows, But Remains Strong
The largest share of funding for the increase in bank assets came from savings deposits, which grew by $50.9 billion (2.6 percent). Over the past 12 months, savings deposits have increased by $325.5 billion (19.2 percent). Deposits in foreign offices ended a string of three consecutive quarterly declines, rising by $37.4 billion (6.2 percent) in the second quarter. Short-term nondeposit borrowings were another significant contributor to commercial bank funding. Other borrowed money with a remaining maturity of less than one year increased by $35.6 billion (12.4 percent). Banks increased their borrowings from Federal Home Loan Banks by $13.8 billion during the quarter, with all of the growth occurring in longer-term (over 1 year) borrowings. Trading liabilities jumped by $46.4 billion (26.1 percent), as revaluation losses on derivatives contracts increased by $43.5 billion (43.6 percent). Brokered deposits fell by $1.3 billion (0.5 percent) during the quarter, only the second time in the last 14 quarters that these deposits have decreased.
Number Of Insured Commercial Banks Falls Below 8,000
The number of insured commercial banks reporting financial results declined from 8,005 to 7966 during the second quarter. One insured commercial bank failed during the quarter, while 66 were absorbed in mergers with other institutions. There were 26 new banks reporting financial results. The number of commercial banks on the FDIC's "Problem List" increased from 102 to 115 during the quarter, but assets of "problem" banks declined from $36.7 billion to $35.9 billion.
August 29, 2002
Donald E. Inscoe (202) 898-3940
Ross Waldrop (202) 898-3951