Record increase in net interest margin drove up bank profits: FDIC

WASHINGTON — Bank net income grew year-over-year, driven by a record increase in the margin of what institutions earned on interest, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile. 

Bank profit in the third quarter totaled $71.7 billion, up 11.3%, or $7.3 billion, from the quarter prior. From a year ago, profit grew $2.2 billion, or 3.2%.  

Despite the bump in bank profitability, future vulnerabilities could stem from consumers’ ability to repay loans taking a hit from rising interest rates, and from unrealized losses in securities portfolios which continue to grow. 

Martin Gruenberg, acting chair of the Federal Deposit Insurance Corporation, said that while bank interest income rose dramatically in the third quarter, he expects that deposit costs will rise as banks pay more interest on deposits.

Sarah Silbiger/Bloomberg

“Despite several favorable performance metrics in the third quarter, the banking industry continues to face significant downside risks,”acting FDIC Chairman Martin Gruenberg said. “These risks include the effects of inflation, rising market interest rates, and continued geopolitical uncertainty. Taken together, these risks may reduce profitability, weaken credit quality and capital, and limit loan growth in coming quarters. Furthermore, higher market interest rates have led to continued growth in unrealized losses in the banking industry’s securities portfolios.” 

Rising profit comes as banks benefited from the Federal Reserve hiking its benchmark interest rate. 

Net interest margin, notably, jumped 35 basis points from last quarter and 58 basis points from the year prior, both the largest jumps on record. It’s the first time net interest margin has hit above 3 percent since the first quarter of 2020, but remains below the pre-pandemic average of 3.25%. 

That could change in future quarters, Gruenberg said, as banks will eventually need to pay their customers more for deposits

“At some point, we would expect the gap between interest income and expenses to narrow as market forces place pressure on banks to raise deposit rates faster than they have to date,” he said. 

Deposits declined for a second consecutive quarter, reaching $19.4 trillion, spurred by a reduction in uninsured deposits that offset a small increase in insured deposits. This is the third straight quarter that uninsured deposits have declined. 

Total deposits are still “well above” pre-pandemic levels, Gruenberg said. 

The FDIC in October finalized a rule requiring banks to pay more for their deposit insurance. The rule increases assessment rates 2 basis points beginning the first quarter of next year, aiming to return the deposit insurance fund to its statutory minimum of 1.35%. 

Although banks have pointed to the recent decline in deposits as evidence that the agency should slow its plan to hike fees, Gruenberg said at a press conference following the release of the quarterly banking profile that the recent numbers don’t change the agency’s perspective on increasing assessment fees. The reserve ratio remains at 1.26%. 

“It indicates to us that the measure we took earlier in terms of bumping up deposit insurance assessment was still a prudent measure to have taken,” he said. 

Looking forward, Gruenberg said the FDIC will be watching the further effects of the interest rate environment on banks, credit quality among consumers and banks’ unrealized losses on securities. 

Higher interest rates could wear down the value of real estate, as well as other assets, and hamper consumers’ ability to repay loans. 

The agency is already seeing some trouble brewing in the charge-off space, namely among auto loan and credit card net charge-offs. An increase in loan net charge-offs drove a 6-basis point increase in the industry’s net charge-off rate from last year. Early delinquencies ticked up from the same quarter last year because of consumer loans, as well as commercial and industrial ones. 

“These early delinquencies could be an indicator of future asset quality problems, and will be an area of continued supervisory monitoring,” Gruenberg said. 

Market pressures and interest rate growth also negatively impacted banks’ results in some areas. Unrealized losses on securities jumped from $469.7 billion in the second quarter to $689.9 billion in the third. Unrealized losses on held-to-maturity securities totaled $368.5 billion, up from $241.8 billion the prior quarter. 

The number of problem banks increased by two from the previous quarter to 42 banks. Total assets held by problem banks fell $5.7 billion to $163.8 billion in the third quarter, still in the range of the fourth quarter of 2021 when the number spiked to triple the previous figure

No banks failed in the third quarter. Three new banks opened, and 26 merged. 

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