US bank earnings jump 11.9 per cent in 4Q; loan losses up

WASHINGTON – The impact of plummeting oil prices has shown up in the financial picture of U.S. banks, whose losses from loans increased for the first time in five and half years, according to new government data.

U.S. bank earnings jumped 11.9 per cent in the final three months of 2015 compared with the previous year as revenue rose. Legal expenses declined as some big banks wound down legal settlements that arose from the financial crisis.

But the data issued Tuesday by the Federal Deposit Insurance Corp. showed an increase in loan losses for the industry for the first time in 2009, during the crisis. The increase in loans that banks wrote off as uncollectible was especially strong — 43.4 per cent — for industrial borrowers as tumbling oil prices hurt energy companies.

Falling oil prices over the past year and a half — now hovering around $30 a barrel for crude oil from a $100 high in mid-2014 — have sliced into the profits of energy companies and put projects on hold. Big Wall Street banks have made loans to energy companies to finance oil production in Texas, North Dakota and elsewhere. As cash flow from oil sales has trickled, some companies are straining to repay their loans.

The fallout has come fast. The six largest U.S. banks — JPMorgan Chase, Goldman Sachs, Citigroup, Morgan Stanley, Wells Fargo and Bank of America — have tens of billions of dollars of exposure to risky energy loans that won’t all be paid back. The value of those loans will have to be written down even further, and bank profits are going to take a hit, the credit agency Moody’s has said.

The energy-related loans on the balance sheets of the biggest banks represent only a small percentage of their overall lending, but the losses will be noticeable.

Smaller and regional banks that operate in areas like Texas and North Dakota and cater to energy companies also are feeling the pain.

This ripple for banks comes amid a steady recovery in the banking industry since the crisis struck in the fall of 2008. The FDIC reported that U.S. banks earned $40.8 billion in the October-December quarter, up from $36.4 billion a year earlier.

More than half of all banks, 56.6 per cent, reported an increase in profit from a year earlier. Only 9.1 per cent of banks were unprofitable.

The number of “problem” banks on the FDIC’s confidential list fell below 200 for the first time in more than seven years, since the financial crisis.

FDIC Chairman Martin Gruenberg took note of the impact of the steep fall in oil prices.

“Recently, domestic and international market developments have led to heightened concerns about the U.S. economic outlook and prospects for the banking industry,” Gruenberg said at a news conference. “Thus far, the performance of the banks has not been impacted materially. However, the full effect of lower energy and other commodity prices remains to be seen.”

In the fourth quarter, banks increased the amounts they set aside to cover potential losses on loans by 45.5 per cent, or $3.8 billion, from a year earlier, the FDIC reported. That brought the total set aside for the latest period to $12 billion — the highest level in three years.

And lending grew by 2.3 per cent, driven by a mostly seasonal increase in credit card balances and a rise in commercial and industrial loans.

The number of banks on the FDIC’s “problem list” fell to 183 from 203 in the third quarter.

The number of bank failures continues to slow, marking eight last year. That is still more than normal. In a strong economy, an average of four or five banks closes annually. But failures declined from 24 in 2013 and were down sharply from 157 in 2010 — the most in one year since the height of the savings and loan crisis in 1992.

The decline in bank failures has allowed the deposit insurance fund to strengthen. The fund, which turned from deficit to positive in the second quarter of 2011, had a $72.6 billion balance at the end of December, according to the FDIC. That was up from $70.1 billion at the end of the third quarter.

The FDIC was created during the Great Depression to insure bank deposits. It monitors and examines the financial condition of U.S. banks. The agency guarantees bank deposits up to $250,000 per account.