The Federal Deposit Insurance Corporation (FDIC) recently released the quarterly banking profile for the first quarter of 2011. This report provides a detailed overview of the condition of the banking sector in the United States. Digging into the details provides some important insight into what small business owners can expect for the remainder of the year and into 2012.
Bank profitability is up
During the first quarter, the sector generated net income of $29 billion, the best quarter since the second quarter of 2007 and represents the seventh consecutive quarter of rising profits. Only 15 percent of banks reported a loss for the quarter, a significant decline from the previous year.
Banks expect less loan losses moving forward
Banks are required to set aside a certain amount of their capital in anticipation of a percentage of their loans going unpaid. These loan loss reserves are a good indicator of what bank executives expect from their portfolio of loans. Provisions to loan losses were reduced to $21 billion at the end of the first quarter, less than half of the level from the previous year. Forty-nine percent of banks reduced their loan loss reserves.
Revenues are down, especially at the big banks
Banks make money in two main ways. First, there is the net interest margin, which is the difference between what they pay out to depositors and what they charge borrowers. The second way is by charging fees to their customers. Together, these two revenue streams are called “net operating revenue.”
During the first quarter of 2011, net operating revenue fell by over $5 billion. The main culprit of this decline is the reduction in net interest margin. For the first time since 1989, banks showed a year-over-year decline in net interest margin. This is worrisome and is an indicator that banks remain very cautious in their lending. If they were lending out more, they would be generating more net interest margin, which would contribute to the revenue line.
Not surprisingly, much of the decline in revenue is concentrated at the large financial institutions. Eight of the 10 largest banks in the U.S.—which together control more than half of all loans in the country—showed a decline in net interest margin.
Banks are expanding, but outside of their loan portfolios
This is another worrisome trend for small business owners. Instead of choosing to expand by increasing the size of their loan portfolios, banks are looking for other opportunities to generate revenues and income. Remember that for banks, loans are assets, not liabilities, since the money is owed to the bank.
During the first quarter of 2011, the value of loans outstanding held by banks declined by nearly $127 billion. The types of loans that suffered the worst declines were 1 to 4 family residential mortgages, credit cards and construction loans. This probably isn’t too surprising. While this represents a small percentage of the total value of loans outstanding, the stimulative effect of that money would be significant if loaned out to consumers. Business loans, known as commercial and industrial loans, actually did increase slightly by $18 billion. But 47 percent of this increase was in the form of loans to foreign businesses, not to U.S. companies.
So what’s the bottom line?
In general, the condition of the banking sector does not paint a positive picture for a material increase in business lending. While the banks are clearly stabilizing their position after several tumultuous years, they still do not feel ready to begin lending on a significant scale. This trend will most likely continue through the end of 2012.