Carpe Diem

US banks have most profitable quarter in six years

The FDIC released its Quarterly Banking Profile today for Q3 2012, here are some highlights:

1. U.S. banks earned a total of $37.6 billion from July through September, a 6.6% increase compared to Q3 2011, and the most profitable quarter for the banking industry in six years, since Q3 2006 (see chart above).

2. The Q3 increase in bank profits from a year ago was the 13th consecutive year-over-year gain in quarterly bank profits starting in Q3 2009, following ten consecutive decreases from Q1 2007 to Q2 2009.

3. At $37.6 billion, Q3 was the third most profitable quarter in history for the industry (not adjusting for inflation), and just slightly behind all-time record high bank profits of about $38 billion in both Q2 2006 and Q3 2006.

4.  More than half of all 7,181 FDIC-insured banks (57.5%) reported higher profits in Q3 than a year ago, and only 754 (10.5%) reported negative net income for the quarter. This is the lowest proportion of unprofitable banks in more than five years, since Q2 2007.

5. Only 12 institutions failed in Q3 of this year, which is the smallest number of bank failures in a quarter since Q4 2008.

6. The number of institutions on the FDIC’s “Problem List” fell from 732 to 694, which is the smallest number of “problem” institutions since Q3 2009.

7. Banks set aside $14.8 billion in Q3 for loan losses, which was down from $18.6 billion in the same quarter last year, and the 12th consecutive quarter of year-over-year declines.  Bank provisions for loan and lease losses of about $14.5 billion on average so far in 2012 is the lowest level since the first half of 2007.

MP: Overall, this is a very positive report for the financial performance of U.S. banks in Q3: profits are the highest in six years and close to an all-time high, the proportion of unprofitable banks is now the lowest in five years, quarterly bank failures fell to the lowest level in almost five years, the number of “problem” institutions is at a three-year low, and bank provisions for loan losses are the lowest in five years.  Today’s FDIC report indicates that the profitability and overall financial health of the U.S. banking industry has gradually returned to the pre-recession levels that prevailed in 2007.

19 thoughts on “US banks have most profitable quarter in six years

  1. At what rates do the banks borrow? What is their spread on their loans?

    I suspect that the profit opportunity provided by a 0% ff rate would generate nothing less than record profits.

    Meanwhile, millions of “savers” are getting clobbered.

  2. I’ve read where QE’s hidden benefit to corporations is their ability to access cheap long-term funding. Financial institutions, on the other paw, are maximizing short-term profits rather than build a stable base of funding that will protect them when interest rates inevitably rise again – this focus on short-term deposits, enables the banks to improve their net interest margins as the cost of government-backed deposits is next to nothing, while the interest that must be paid on a 10-year bond is over 3% – AND, it also increases the government’s exposure if the banks get into trouble again, shifting risk from private bondholders to the government.

    It’s all rather ingenious, unless you’re a simple John Doe like me.

    • I don’t understand this. Financial institutions have always funded their positions in the overnight market. They borrow at the short end of the curve and lend at the long end. I don’t understand what you’re trying to say.

      They basically profit from the spread on an positively sloped curve. The point of ZIRP is to allow them to borrow at near-zero so that they make a positive return when they lever up at 30:1 (the lower your leverage the less helpful the ZIRP). What are you claiming changed in that model?

      • I think the same as you – just that they are not lending at the long end much these days. Why go long when you can stay short and deflect the risk to the Govt.

        • They are, Moe. They’re just buying things like Treasurys (10′s, 20′s and 30′s). That’s been a big trade for the banks. If they didn’t have that spread trade on, they wouldn’t make any money.

          I think what you’re saying is that they aren’t lending to smaller businesses anymore. Perhaps your (or this article’s) complaint is about whom the banks are lending to? It’s a legitimate complaint. And let’s not forget that not only are the banks more risk averse, the Fed also tightened lending standards as it initiated ZIRP.

          • Yes, the article was from WSJ, I believe David Wassel – he pointed out banks repo financing was as larger or larger than their long-term debt outstanding.

            I am interested in exactlywho benefits from QE..seems to me the average Joe is left out of the party? I get on the consumption side it has benefits (low interest payments), but hard to feed the pig in this environment (save).

          • the big beneficiary of QE are the banks and the government. it’s sort of a perpetual motion machine to fund deficits and has painted us into a very nasty corner.

            banks borrow money for essentially zero from the fed. they use it to buy us treasuries at 10 or 20 to 1 leverage. this yields a great deal of profit.

            it also lets the federal government run huge deficits without having to pay up in terms of bond yield.

            but this codependency has a dark side. how do you stop?

            if the fed ends zirp and the cost of capital rises, this trade starts looking bad. it would not take much of a rise to wreck it.

            the banks get squeezed and it sets off the next big round of bank failures and hideous insolvency.

            owning 20:1 geared bonds when rates rise will lead to epic capital losses as bond prices fall.

            this is the next big crisis that is setting up and it’s not really clear to me how it can be avoided.

          • Morganovich,

            I think the banks’ leverage on those trades is much higher – more like 24-30x. As “default free” government bonds, they fall into the “least risky” category and the banks are allowed to lever them up a lot.

            Moe,
            First of all, because of tightened lending standards (except in the vast majority of the housing sector…oh so helpfully), few are borrowing at a lower rate from banks. The interest on other debt instruments is really set by the Treasury market. Treasuries are the proxy for the “risk-free” asset and then there’s a risk premium above that. Treasuries yields are driven by demand for Treasuries.

            Speaking of which….how much of the newly created Treasuries is the Fed buying?

            As Morganovich says: it’s a vicious and ugly circle from which the politicians, the politically connected and especially banks profit from at the expense of everyone else, particularly the prudent savers. Welcome to our Banana Republic.

            You might find this interesting.

          • Methinks

            You might find this interesting.

            Indeed! Thanks for ruining my day. Seldom have I seen such a clear and succinct explanation of the problem. Sometimes it’s possible to pretend for a short time that things aren’t really that bad, but not after reading Kling’s excellent piece. At some point the S will hit the F.

          • methinks-

            you are probably closer to the banks than i am so you are likely correct about the leverage.

            here’s the thing i just cannot get my head around:

            exactly how do these banks plan to get themselves out of this trade?

            the whole thing is predicated on ZIRP. i do not think anyone is claiming ZIRP will be in force for 10 or 20 or 30 years.

            so just what are they planning to do? to whom are they going to sell all these treasuries especially as they are all going to want to sell at the same time.

            it seems to me that announcing the end of ZIRP could well crash the bond market. it does not take much of a drop to wipe out huge chunks of value if you are at 25:1 gearing.

            do they think the fed will end up being the buyer of last resort?

          • Morganovich,

            I’m not longer that close those [insert expletive here]b anymore. It may be as low as 15x for some banks, but it’s certainly more than 10x for all of them. High enough to do a lot of damage. But, that’s not even my biggest concern. My biggest concern is the leverage in derivatives – something nobody is looking at as they are all fascinated by twists and ZIRPs.

            What do you mean “when ZIRP ends”? Once the banks got on political life support, they lost all interest in free enterprise. And regulation coming down the pike will cement their zombie positions forever. The way this is accomplished may change over time, but that this is the case

            If the banks want out of Treasurys, then everyone else does too. I’m guessing the Fed will be the buyer and the pressure on the dollar will cause a currency collapse, hyper-inflation and lead to even more and more egregious property expropriation by the government.

            It’s very hard to predict the future and for the same reasons central planning is impossible, but I think the probability of this kind of event increases with every year. These events are not uncommon throughout history and the timing is impossible to predict. At this point, my personal opinion is that it will happen in my lifetime.

          • m-

            “What do you mean “when ZIRP ends”? Once the banks got on political life support, they lost all interest in free enterprise”

            i mean that rates have to rise at some point. are you anticipating some sort of japanese situation? that seems untenable in the medium term here as our demographics are not deflationary in the way that theirs are.

            it does strike me that this blow up is going to be the really scary one that will result in de facto bank nationalization in the way that the mortgage industry was nationalized.

            in our lifetime seems pretty optimistic. i was thinking in the next 5 years or so.

          • Morganovich,

            Deleveraging continues, the U.S. is the largest economy on earth by a pretty wide margin, and mostly because we will be the tallest pygmy for years, with the largest and most liquid sovereign debt market in the world (the importance of that should not be underestimated) as Europe implodes, followed by Japan (the shit is nearing the fan right now). As the cleanest of the filthy shirts, we can expect panicked capital to flow into our sovereign debt, driving down interest rates. Of course it’s possible the “sudden stop” will happen in the next five years (I’m moving my assets around now for a reason), but I don’t think it’s probable. In 10 years it becomes much more probable. At least that’s what I think now. Some unforeseen by me thing could happen to improve the situation dramatically and the opposite could happen – we could suffer a catastrophe in a way I can’t imagine today. At least half of what I know is wrong (probably more). I just don’t know which half (a much wiser person than me once said).

          • methinks-

            so you anticipate ZIRP to continue for more than 5 more years?

            it seems to me that if the FF rate went to 2%, that would cause the “sudden stop” you describe by making US banks insolvent as they take huge principal hits on M2M bond portfolios at high gearing.

            i agree that the US may limp along as the fastest horse in the glue factory, but how does that keep banks liquid if zirp ends? do you really think we could entice enough foreign buying to keep the banks whole?

            it seems to me that when zirp ends, we may really be in for it.

            thinking hard about shorting a pile of 5-10 year treasuries to buy some munis at around 4% and just living off the spread and the leverage and waiting for the boom. of course, you want munis not paid for by taxes but rather revenue from specific infrastructure projects, but there seem to be some interesting ones around.

            gotta be less work than picking smallcaps.

            the risk seems to be in that the spread might widen and lock you into needing to hold to maturity, but it still looks profitable, especially in the near 5. 3.5% tax free can lever up and get pretty interesting.

          • Morganovich,

            The Fed will do anything to make it rain profits on zombie bans. So long as people are willing to lend to the United States (via T-Bills and Treasuries), the Fed will find no acceptable reason (to the FED, there are plenty of good economic reasons) to increase FF. Basically, until the market forces the Fed’s hand, it’ll keep ZIRP. And I’ve shared my opinion of the likelihood of the market disciplining the Fed in the next few years. Let’s hope I’m right because a.) you and I borrow at near zero (although since we’re both long the U.S. right now and our preference is to stay that way and our profits are so large that ZIRP doesn’t do much for us, we’d prefer normal rates) and 2.) a longer time horizon gives us more time to get our affairs in order.

            i agree that the US may limp along as the fastest horse in the glue factory, but how does that keep banks liquid if zirp ends?

            Good news. The banks are not in such bad shape anymore. The Fed has robbed the most prudent among us to recapitalize banks, so they’re in pretty good shape. Much better than European banks. They won’t implode if ZIRP is pulled. Without ZIRP, they certainly won’t be making record profits and maybe not even much of a profit at all. Their stock price might plummet along with their profits, but they won’t be insolvent. Do you think they’ll thank all the savers who were robbed in order to bail them out (that’s the really big bailout here)? Yeah….

            thinking hard about shorting a pile of 5-10 year treasuries to buy some munis at around 4% and just living off the spread and the leverage and waiting for the boom.

            I can’t mention specifics, but a large firm I will not name does this trade in size all the time. They are the masters of that trade. During the crisis, they got clobbered on both sides of the spread and firm only survived because their clearing firm cut their leverage and essentially bought them in. No doubt there’s alpha in that trade, but there’s a lot of unhedgeable risk, so it’s impossible to hedge that alpha. So long as you keep that in mind and adjust your trade size and leverage accordingly, it sounds like a good idea to me.

            gotta be less work than picking smallcaps.

            Virtually anything is easier than that.

  3. Hooray for bailouts, central planning, and money printing. Wall Street get to make a decent profit while Main Street struggles to find jobs and stay afloat. You have to love crony capitalism if you are a bank employee at this time.

  4. Why would anyone think record profits to the banks is a good thing? I have nothing against profits mind you, but I would rather see record profits attachefd to some kind of tangible production.

    Record profits at the banks mut be cutting in to profits at CAT, DR Horton, etc.

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