More Profits, More Problems

As an industry, we just made more money than ever before. But it would be wise to see the good news in context.

Late in January, the Federal Deposit Insurance Corp announced that profits at commercial banks and savings institutions collectively reported aggregate net income of $40.3 billion in the fourth quarter of 2013—a record by any measure.  The $5.8 billion recorded marks 16.9 percent spike over the same quarter last year. This is the 17th time in 18 quarters that there have been increased profits. That’s a steady drumbeat of positive numbers since the third quarter of 2009, barely a year a year after the dark days of bank bailouts dominated the headlines. For 2013 overall, the industry took in $155 billion, a 10% jump over 2012 and a lot higher than the $148 billion of 2006, the previous record.

Man Looking at CalendarAnd there’s more. The FDIC insures 6,812 institutions, and more than half of them, 53% had year-over-year growth for the quarter. On the flip side, the 12.2% booking losses is better than the 15% that had a losing quarter in 2012. In fact, the number of banks on the ‘problem list’ was down to 467 at year-end 2013, the lowest number since the financial crisis. In fact, it was 888 in early 2011.

Of course, there is nuance in these numbers. The FDIC notes that a big part of the bottom-line boost can be attributed to an $8.1 billion decline in loan-loss provisions. More specifically, 20% of the profits came from putting away less money to cover future losses—more a sign of accounting maneuvers than good business. On a related note, there was significantly less mortgage activity and lower trading revenue, leading to a year-over-year decline in net operating revenue.

Looking at the big picture, here’s one major takeaway. While lending rose generally, primary mortgage loans fell by $51 billion for the year. That’s a bad sign for economic recovery, and it’s got the critics out: At its annual meeting in January, JPMorgan Chase executives got asked why, since its faring so much better, the company isn’t doing more to help borrowers. In the wake of the FDIC report, expect this question to come up a lot more often, particularly since the mortgage market is expected to fall even faster this year.

To get a (perhaps unfair) sense of the dichotomy, here’s a curious factoid: The FDIC is stepping up its legal efforts against institutions during the financial crisis half a decade ago. Cornerstone Research reports that the agency filed 40 director and officer lawsuits in 2013, the same year that had such stellar results. That’s a 54% jump over the 26 suits filed in 2012.

Much of the litigation revolves around the surge in bank failures in 2009 and 2010. In fact, of the 140 financial institutions that failed in 2009 alone, 64 have settled claims or been taken to court. How all these cases play out could provide an indication of the pressure the industry will face in the days ahead.

Of course, it might be safe to assume that while these banks failed in 2009 and 2010, some of their woes go back further, perhaps to the days when the mortgage market was exploding. Yet here we are again, facing criticism for not giving out enough mortgages.

The news of a boosted bottom line is a good thing, but it’s no more than a start. The financial services industry can never be insulated from the economy at large—it’s too large, too integral and too important. The fact that profits have risen so sharply means there will be more pressure to generate similar cheer for everyone else.

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