One yr faraway from the 2023 banking crisis, which was the worst because the Global Financial Crisis in 2008-2009, the banking industry continues to recuperate — albeit at a slow pace.
The Federal Deposit Insurance Corporation’s (FDIC) Quarterly Banking Profile, released on Thursday, highlights a few of the progress that has been made but additionally details a few of the continuing struggles.
Let’s take a more in-depth have a look at the great and bad for banks in the primary quarter.
The Good
The headline numbers are indeed impressive, because the 4,568 business banks that the FDIC insures posted total net income of $64.2 billion in the primary quarter, up 79.5% from the prior quarter.
Nevertheless, some perspective is required because the fourth quarter was the worst quarter since 2020, with only $38.2 billion in net income. A part of the explanation it was so low was due to one-time special assessments that giant banks needed to pay to shore up the FDIC’s Deposit Insurance Fund (DIF) after it was depleted in the course of the banking crisis last spring.
A year-over-year comparison reveals that the whole net income was 21% lower in Q1 of 2024 than in the primary quarter of 2023, when it was $81.7 billion. It’s also lower than the $71.9 billion and $71.8 billion recorded within the second and third quarters of 2023, respectively.
Further, the 4,128 FDIC-insured community banks saw their overall net income rise 6.1% in comparison with Q4, reaching $6.3 billion. Nevertheless, their net income still fell 10% yr over yr.
Whether or not this is nice could also be open to interpretation, but there have been another positive developments. Certainly one of them was loan activity.
While total loan and lease balances declined 0.3% from the previous quarter on a 3.2% decline in credit-card loans and 1.4% drop in auto loans, they were up yr over yr. In comparison with Q1 of 2023, loan and lease balances were up 1.7%, led by a ten% rise in credit-card loans, a 2.4% jump in family residential loans, and a 2.4% increase in non-farm, non-residential, business real-estate loans.
What was much more promising was that deposits appear to be coming back, increasing for the second straight quarter. Total deposits climbed by $190.7 billion or 1.1% from the fourth quarter of 2023.
This follows a $187 billion increase in Q4 over Q3. For comparison, the industry saw a $421 billion decline in deposits in Q1 2023, which precipitated the banking crisis.
Finally, the FDIC’s Deposit Insurance Fund (DIF) jumped by $3.5 billion to $125.3 billion, mainly on account of the special assessments paid by banks within the quarter. The reserve ratio improved to 1.17% from 1.15%, moving toward the goal of 1.35% by 2028.
The Bad
Alternatively, while high rates of interest have resulted in higher deposit rates, they proceed to be a drag on bank earnings.
A key measure of a bank’s profitability is the web interest margin (NIM), which is the difference between the interest a bank takes in on loans and the interest it pays out on deposits. In Q1, the general NIM dropped by 10 basis points from Q4 to three.17%, while the NIM for community banks was 3.23%, down 12 basis points.
The NIM also stays 41 basis points below the pre-pandemic average. These numbers indicate that prime deposit costs remain a significant factor and should not let up until rates of interest start dropping.
The opposite negative aspect on this report is the general decline in credit quality. The proportion of total loans that were 90 or more days overdue was 0.91%, which is 5 basis points higher than last quarter and 16 basis points higher yr over yr.
Nevertheless, the ratio stays well below the pre-pandemic average of 1.28%.
The rise primarily stems from an increase in delinquent business and industrial loans and non-owner-occupied business real-estate (CRE) loans. For the latter, the 1.59% delinquency rate is at its highest level because the fourth quarter of 2013.
Finally, the web charge-off rate, which is the proportion of bad loans that banks don’t think will ever be repaid, was 0.65%. That’s unchanged from the previous quarter but 24 basis points higher than it was in the primary quarter of 2023 and 17 points greater than the pre-pandemic average.
The foremost concern is bank cards, because the credit-card net charge-off rate was 4.7%, the best because the third quarter of 2011 and up 55 basis points from Q4.
When credit quality deteriorates, banks normally must commit more to their provisions for credit losses, which eats into their earnings.
Do you have to buy bank stocks?
Thus far in 2024, large bank stocks are up 5.8%, in line with the KBW Nasdaq Bank Index, but regional bank stocks are down 13.3%. Thus, investors excited about bank stocks must be looking more toward the big banks, as regional and small banks have way more risk.
While things are slowly improving, the economic environment of high rates of interest and a potentially slowing economy presents continued challenges for banks. That shouldn’t be to say there aren’t some really good deals on the market immediately, because there are, but investors should do their due diligence on individual bank stocks before buying.
Disclaimer: All investments involve risk. By no means should this text be taken as investment advice or constitute responsibility for investment gains or losses. The data on this report shouldn’t be relied upon for investment decisions. All investors must conduct their very own due diligence and seek the advice of their very own investment advisors in making trading decisions.