Bank Profits Rise Despite Headwinds

Rising interest rates fuel an expansion in loan balances and net interest income

U.S. bank profits climbed 7.8% in the second quarter of 2022 from the previous quarter, according to the Federal Deposit Insurance Corporation (FDIC). The agency said banks reported $64.4 billion in profits as higher net interest income offset growing reserves to guard against loan losses. Profits were down $6.0 billion or 8.5% from a year ago. 

The growth in profits came as interest rates rose and banks expanded their loan balances. Total loan balances increased $414 billion, or 3.7% from the previous quarter.

In a statement, acting FDIC Chair Martin Gruenberg said the results were generally positive but warned the banking industry continues to face significant downside risks from high inflation, rapidly rising interest rates, and geopolitical uncertainty. "Taken together, these risks may reduce profitability, weaken credit quality and capital, and limit loan growth in coming quarters,” he said.

The FDIC said that the rate of non-current loans that are 90 days or more past due had fallen to 0.75%, the lowest level since 2006. Bank deposits, which had surged during the pandemic, fell 1.9% in the second quarter — the first decline in four years.

The FDIC also reported that bank merger activity continued in the second quarter, with 28 institutions merging, while no banks failed in the second quarter of 2022.

"U.S. banks are in much better shape than they were in prior economic slowdowns, and should benefit from rising interest rates as long as the economy doesn't tumble into a deep recession. Investors are showing more confidence in the banking sector than they are in the broader market, as seen through the slight outperformance of the XLF ETF, which tracks the financial sector, compared to SPY, the SPDR S&P 500 Trust," said Caleb Silver, Editor-in-Chief of Investopedia.

Banking Sector Quarterly Net Income 2008-2022
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