FDIC: Bank profits at record levels due to lower loss reserves

U.S. banking industry earnings increased nearly 10% last year to a record $154.7 billion, according to the Federal Deposit Insurance Corp., due mainly to banks setting aside less money to cover potential loan losses and litigation costs.

The FDIC said Wednesday that fourth-quarter profits at the nation’s commercial banks and thrifts rose 17% to a total of $40.3 billion from $34.4 billion in the final quarter of 2012.

It was the 17th time in the last 18 quarters that earnings have registered a year-over-year gain as the industry continues a slow but steady recovery from the financial crisis and housing debacle.

“Banks continue to put bad loans behind them and overall asset quality is remarkably strong,� American Bankers Assn. chief economist James Chessen said in a statement. “Going forward, problems loans will continue to fall, but at a slower rate.�

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“Problem banks,� those at risk of failure, fell for the 11th straight quarter to 467, down from 515 in the third quarter and 47% below a recent high of 888 as of March 2011. That’s less than 7% of the 6,798 banks and thrifts the FDIC said were operating as of Wednesday

Still, growth overall was elusive, the FDIC said. Reduced income from mortgage lending and trading contributed to a decline in fourth-quarter revenue to $166.1 billion, down $2.8 billion, or 1.7%, from a year earlier.

Loan balances rose 1.2% during the quarter, with all lending categories higher except for residential mortgages. But the biggest contributor to the improved earnings was an $8.1 billion decline in loan-loss provisions, the FDIC said.

“Asset quality improved, loan balances were up, and there were fewer troubled institutions,� FDIC Chairman Martin J. Gruenberg said in a statement. But “challenges remain,� he added.

“Narrow [profit] margins, modest loan growth, and a decline in mortgage refinancing activity have made it difficult for banks to increase revenue and profitability,� Gruenberg said.