US bank earnings roar back, doubts about momentum

WASHINGTON: US bank earnings have bounced back to their highest level since the financial crisis took hold and the pace of failures has eased, giving regulators hope the industry is on sounder footing.

The Federal Deposit Insurance Corp warned, though, about the ability of banks to keep boosting their earnings by setting aside less money to cover bad loans, rather than growing their lending.

The FDIC said on Tuesday that the industry earned $29 billion in the first quarter, an $11.6 billion increase from a year before. It was the highest level since the second quarter of 2007.

But loan balances fell $254 billion, or 3.4 percent, and revenues declined.

FDIC Chairman Sheila Bair, in her last quarterly briefing before she leaves office in July, reflected on the condition of the banking industry when she arrived in June 2006.

"Some were referring to that period as a 'golden age of banking.' But that era proved to be more gilded than golden," Bair said.

She urged banks to not return to that era of aggressive subprime lending, but to take responsible risks in lending.

"At some point, if banks are to continue to increase their profitability, they will have to grow their revenues," Bair said.

The first-quarter numbers showed net operating revenue fell $5.5 billion, or 3.2 percent, from the year-ago first quarter.

The FDIC's numbers are an aggregate of roughly 7,500 US banks. Bank of America, the nation's largest bank, reported in April an unexpectedly sharp drop in first-quarter profit as higher expenses from delayed home foreclosures weighed on its mortgage business.

Wells Fargo, the fourth-largest US bank, saw net-income surge more than 50 percent, but posted a decline in revenue, highlighting how banks achieved earnings growth by setting aside less money for poorly performing loans.

BAIR'S SUCCESSOR

In a positive sign for the industry, the pace of bank closings has slowed and the number of banks on the FDIC's troubled list grew by only four to 888 in the first quarter.

During the quarter, 26 banks failed, compared to 41 in the year-earlier period.

The FDIC does not disclose the names of the institutions, which regulators have flagged for low capital levels, poorly performing assets or other troubles.

The American Bankers Association said on Tuesday that banks have been able to clean up their balance sheets in recent quarters, putting them in a position to begin lending when more people are able to borrow.

"This forward momentum helps solidify the base for making new loans to bolster growth in the expanding economy," ABA Chief Economist James Chessen said in a statement.

The FDIC itself is looking more healthy with Bair saying that the insurance fund used to cover the costs of failed banks should head into positive territory by the end of June.

Bair shepherded the insurance fund during the financial crisis, boosting its resources by having the industry prepay assessments, an accounting maneuver that avoided having the FDIC tap taxpayer funds.

Managing the industry through the post-crisis period will be up to Bair's successor.

The Obama administration has yet to nominate someone for that post, although the pick is expected to be Martin Gruenberg, the current vice chairman of the FDIC.

The FDIC is one of many financial regulatory jobs to fill.

"I wish the administration would put a higher priority on putting names out there and I hope desperately that the Senate can work with the administration in a bipartisan way to move qualified nominees through the process," Bair said told reporters. "Perhaps more than ever it is important to have strong, smart, quality people in these jobs."

Copyright Reuters, 2011