Banks’ Q2 profits rise to $71.5B despite lending headwinds

“The banking industry continued to show resilience in the second quarter. Net income increased and asset quality metrics remained generally favorable,” FDIC Chairman Martin J. Gruenberg said. “However, the banking industry still faces significant downside risks from uncertainty in the economic outlook [and]…weakness in certain loan portfolios, particularly office properties, credit cards, and multifamily loans, continues to warrant monitoring.”Andrew Harrer/Bloomberg WASHINGTON — U.S. Banks’ net income increased to $71.5 billion in the second quarter despite higher provision expenses and deteriorating office markets, according to the Federal Deposit Insurance Corp.’s quarterly report on the health of the banking industry. Second-quarter net income in the industry rose more than 11% from the first quarter of 2024, according to the FDIC report released Thursday. “The banking industry continued to show resilience in the second quarter. Net income increased and asset quality metrics remained generally favorable,” FDIC Chairman Martin J. Gruenberg said. “However, the banking industry still faces significant downside risks from uncertainty in the economic outlook [and]…weakness in certain loan portfolios, particularly office properties, credit cards, and multifamily loans, continues to warrant monitoring.”In the agency’s previous quarterly report, banks showed a significant increase in net income despite declining net interest margins and stress in certain loan portfolios such as commercial real estate and credit cards. While many of the same issues persisted in the second quarter, banks’ interest spreads varied based on firm size. Compared with the first quarter, net interest margins widened for most banks except the largest ones — those with $250 billion of assets — where margins fell slightly. The industry’s overall net interest margin eased 1 basis point to reach 3.16% in the second quarter, remaining lower than the pre-pandemic average of 3.25%.This quarter, FDIC-insured institutions benefited from a reduction in noninterest expenses, including an estimated $4 billion decrease in the agency’s special assessment expense. The FDIC had ordered the special assessment on insured banks to recover a roughly $19.2 billion loss to the Deposit Insurance Fund due to the protection of uninsured depositors following the systemic risk determination for Silicon Valley Bank and Signature Bank. This represents the agency’s most recent estimate for losses incurred following the March 2023 banking failures. Alongside cost reductions, the quarter also featured substantial one-time gains, including about $10 billion from equity security transactions and an after-tax gain of $4.9 billion from the sale of an insurance division. These gains, however, were partly offset by a $2.7 billion increase in provision expenses at mostly large banks, bringing the industry total to $23.3 billion in the second quarter. Banks with more than $250 billion in assets saw the biggest jump in provision expenses, with costs up $3.3 billion — or about 30% — from the previous quarter. Provision expenses, which banks set aside to cover potential credit losses, have been higher than the pre-pandemic average for eight straight quarters. The quarterly increase was mainly due to loan growth, worsening conditions in office real estate markets, and a rise in credit card charge-offs. Despite positive asset quality metrics, loan charge-offs rose in certain segments. Net charge-offs for commercial real estate loans climbed by 12 basis points from the previous quarter, reaching 0.38% — the highest rate since the first quarter of 2013. The net charge-off rate for credit cards hit 4.82% in the second quarter, up 12 basis points from the prior quarter and 134 basis points above the pre-pandemic average. The second quarter marks the highest credit card net charge-off rate reported since the third quarter of 2011.Loan balances grew modestly, while domestic deposits decreased by 1.1%, continuing a trend of declining deposit rates from the first quarter this year. Three institutions were added to the FDIC’s problem-bank list, bringing the total to 66. The Deposit Insurance Fund reserve ratio also saw a slight increase, up 4 basis points to 1.21%. Overall, the number of FDIC-insured institutions dropped to 4,539, as several mergers and one bank failure occurred in the quarter.