American banks saw their profits almost halve in the last quarter of 2023, with institutions facing more downside risk this year, according to the Federal Deposit Insurance Corporation (FDIC).
Fourth-quarter net profits of 4,587 commercial banks and savings institutions insured by the FDIC came in at $38.4 billion, a decline of $30 billion, or 43.9 percent from the previous quarter, according to a Thursday press release from the organization. Full-year 2023 net profit dropped by 2.3 percent from the previous year.
“Ongoing economic and geopolitical uncertainty, continuing inflationary pressures, volatility in market interest rates, and emerging risks in some bank commercial real estate portfolios pose significant downside risks to the banking industry,” said FDIC Chairman Martin J. Gruenberg.
“These issues, together with funding and earnings pressures, will remain matters of ongoing supervisory attention by the FDIC.”
The decline in quarterly earnings was driven by “non-recurring, non-interest expenses” at large banks, which could refer to the special assessment fee that large banks had to pay the FDIC.
Following the failures of Silicon Valley Bank and two other larger financial institutions last year, the FDIC’s deposit insurance fund lost $16 billion. The FDIC then directed banks to pay a special assessment fee to recoup these losses and replenish the fund.
In May last year, the organization said that the nation’s biggest banks would pay $15.8 billion over two years as special assessment fees.
Lower interest income and higher provision expenses also contributed to the decline in banking profits.
The net interest margin (NIM) of the banks fell by two basis points, to 3.28 percent, in the fourth quarter. NIM is the difference between interest paid and received by the banks, representing the profitability and growth of the institutions.
“NIM declined as the increase in deposit and non-deposit liability costs more than outpaced the increase in asset yields,” the FDIC stated. The total number of FDIC-insured institutions fell by 27 entities during the fourth quarter.
Noncurrent loans rose by four basis points to 0.86 percent. These are loans that are 90 days or more past due or in nonaccrual status. The share of loans that were 30–89 days past due spiked by seven basis points.
“Credit cards and nonfarm, nonresidential commercial real estate loans drove the quarterly increase in the noncurrent rate, while residential mortgages drove the quarterly increase in the share of loans 30–89 days past due.”
Net charge-off rates—debts that banks do not expect to collect—increased 29 basis points from a year back. The rate was 17 basis points higher than its pre-pandemic average. Credit cards led the annual increase in net charge-off balances.
Stress Tests, Credit Quality
The report on bank profits comes after the FDIC released its 2024 economic scenarios that will be used in the upcoming stress tests for banking institutions.Stress tests were introduced in the wake of the 2008–09 financial crisis. The FDIC uses these tests to ascertain the amount of capital that banks would need to be deemed financially healthy. The tests determine how much money banks can return back to their shareholders through dividends and buybacks.
The most severe scenario of the tests will look at how banks will fare when there is a 36 percent decline in home prices, a 40 percent decrease in commercial real estate prices, and a 6.5 percentage-points jump in the unemployment rate.
The stress test results, to be released in June, will be closely watched by investors. Banks claim that they are well poised to ace the tests.
“The nation’s largest banks ... are strong, highly capitalized, and an important source of support to American households and businesses, even in the face of significant economic headwinds,” said Kevin Fromer, head of the Financial Services Forum, according to Reuters. The organization represents CEOs from the biggest eight American banks.
Meanwhile, the credit quality of large, syndicated banks remains moderate, according to the FDIC’s Shared National Credit (SNC) program.
“Overall, SNC credit risk increased but remains moderate. The trend reflects the pressure of higher interest rates on leveraged borrowers and the impact of compressed operating margins in some industry sectors,” the FDIC said in a report last month.
The organization found that risk in leveraged loans remained high, with industries like technology, telecom and media, health care and pharmaceuticals, and transportation services being susceptible to such risks. In the real estate sector, risk was found to be “segmented,” with some subsectors exhibiting deteriorating trends.
“The magnitude and direction of risk in 2024 will be impacted by borrowers’ ability to manage through shifts in interest rates, the commercial real estate sector, and other external factors,” it stated.
“These conditions will continue to impact the financial performance and repayment capacity of borrowers in a wide variety of industries, especially highly leveraged borrowers that may lack the financial flexibility to respond to external challenges.”
