Leaving aside the worries over Basel III requirements and the 300-plus new regulations soon to spew forth from Dodd-Frank, first quarter data from the FDIC has been parsed by ValuEngine Chief Strategist Richard Suttmeier and while the numbers look good, a peek under the hood reveals problems.
Profits in the banking sector were up for the 7th consecutive quarter as total net income was $29 billion. Only 15% of banks were unprofitable in Q1. However, the profits came from banks putting less in loan-loss provision. The collective provision for loan-loss was more than cut in half from a year ago: $51.6 billion to $20.7 billion.
At the same time Net operating income was 3.2% lower than a year ago. “This is only the second time in 27 years for which data are available that the industry has reported a year-over-year decline in quarterly net operating revenue (net interest income plus total noninterest income),” Suttmeir writes.
And while the big banks get bigger–the top four banks have $6 trillion in assets, 45% of all bank assets–these banks’ net operating income is shrinking. Six of the largest 10 banks produced lower net operating income from a year ago.
Larry Kudlow may think banks have started lending, but the numbers show otherwise. Loans were down $126.6 billion or 1.7%, the 5th largest decline in the 28 years that number are available. C & I loans increased by 1.5%, but nearly half the growth was to non-US borrowers.
The reserve coverage ratio (loan-loss provision/non-current loans) remains well under 100%.
Insured deposits have grown close to 50% from Q4 2007 to $6.4 trillion. The Deposit Insurance Fund continues to be negative. The DIF Reserve ratio is -0.12, a long way from the 1.35% required by Dodd-Frank by 9-30-2020.
