2nd-Quarter Bank Earnings Plummet 12% to 4-Year Low
The banking industry, suffering the weakest second-quarter profit in four years, is “bumping along at the bottom of the recession,” Federal Deposit Insurance Corp. Chairman L. William Seidman said Tuesday.
Bank profits fell 7.8% to $4.63 billion in the second quarter ended June 30 from $5.64 billion in the first quarter and were down 12% from the $5.27 billion in the same period a year ago, the FDIC reported. The earnings of California banks, many hurt by troubled real estate loans, plunged to $361 million from $904 million in the same period a year ago.
“Unfortunately, the second-quarter figures could be characterized as the banking industry bumping along the bottom of the recession,” said Seidman. “It doesn’t look like it’s getting much worse, but it doesn’t look like it’s getting much better.”
The weaker earnings have driven more banks onto the FDIC’s problem list of troubled institutions and increased the pressure on the deposit insurance fund, which protects savings accounts up to $100,000.
Seidman, whose term as FDIC head ends Oct. 15., repeated that the insurance fund could approach insolvency by year-end. He said the fund’s fate is linked to the potential failure of several major banks and recapitalization efforts in Washington.
Regionally, bank profits were weakest in the Northeast, followed by the West, particularly California, Nevada and Oregon. The Northeast has suffered from a real estate slump for two years, but in recent months commercial real estate in Southern California has begun to show signs of trouble.
Seidman said the commercial real estate market had stabilized in Northern California. But the Southern California vacancy rate keeps rising and the situation is uncertain because of the large volume of new office space coming on the market, FDIC officials said.
“More and more buildings are still going up in Los Angeles,” said Donald E. Inscoe, FDIC associate director of banking statistics.
Although California banks’ holdings of troubled real estate loans are growing significantly, the state still looks better than the nation as a whole and is far stronger than New England and the mid-Atlantic states.
As of the second quarter, troubled real estate assets--properties foreclosed or loans overdue 90 days or more--accounted for 5.21% of the real estate loans made by California banks. In contrast, 7.59% of the U.S. banking system’s $847.8 billion in real estate loans were classified as troubled. Real estate financing has been ravaged in Massachusetts, with 17.2% of assets troubled, and in New York, where the figure is 14.3%.
The FDIC report also provided evidence of a credit crunch. The volume of bank loans outstanding dropped $14 billion in the second quarter, after a $20-billion decline the first three months of the year. This marked the first time that lending has fallen two consecutive quarters since the FDIC began keeping quarterly records in 1973.
“The shrinkage can be attributed to the recent difficulties in many real estate markets, continuing soft loan demand stemming from a weak economy and the longer-term defection of many large commercial borrowers to non-bank competitors,” the FDIC reported.
Some borrowers have complained that banks, under pressure from regulators, are so zealous in putting aside money to cover real estate losses that they are calling in loans from good customers and refusing to offer new lines of credit.
The banks and regulators say they are simply responding to the weakening commercial real estate market, where vacancy rates rise while the price of office buildings declines, eroding the value of billions of dollars worth of real estate loans.
In all, banks set aside reserves of $8.2 billion in the quarter to cover future loan losses, a sharp increase of $1.1 billion from the prior quarter and $1.7 billion from the same period a year ago.
The FDIC said 1,072 banks with assets of $445 billion are on its list of problem institutions. But the most imminent threat to the bank insurance fund comes from the uncertain prospects of a handful of institutions. The fund’s fate “will depend on how four or five major institutions do” the rest of the year, Seidman said.
Although it had a midyear balance of $4.5 billion, the fund could dip as low as $1 billion at year-end, too little for its mission of safeguarding deposits, he said.
Congress will consider bank reform bills this month that include temporary borrowings from the Treasury for the depleted insurance fund. The banking industry is supposed to repay the loans, but if it cannot earn enough profits to do so, a taxpayer bailout would be inevitable.
Bank Earnings Under Pressure The Federal Deposit Insurance Corp. said commercial banks nationwide earned $4.6 billion in the second quarter, down 12% from a year earlier and 7.8% from the first quarter. FDIC Chairman L. William Seidman predicted that the fund insuring deposits will be nearly insolvent by year’s end. Net income plumments in California. . . Banks in most Western states reported improved second-quater earnings over the previous year’s period. But institutions in California, Nevada and Oregon reported significant income drops largely due to real estate loan problems. Legend 1991 figures in boldface 1990 figures in lightface Dollars in millions, for three months ended June 30 Washington: 1991: $115 1990: 100 Idaho: 1991: $24 1990: 25 Montana: 1991: $19 1990: 19 Wyoming: 1991: $15 1990: 12 California: 1991: $361 1990: 904 Nevada: 1991: $11 1990: 95 Utah: 1991: $35 1990: 29 Colorado: 1991: $37 1990: -50 Arizona: 1991: $-1 1990: -34 New Mexico: 1991: $10 1990: -1 Texas: 1991: $277 1990: 233 Alaska: 1991: $18 1990: 17 Hawaii: 1991: $53 1990: 53 Source: Federal Deposit Insurance Corp.
Bank Earnings Under Pressure
