The happy days on Wall Street have never been happier.
According to the latest quarterly FDIC report released on Thursday, banks reported aggregate net income of $60.2 billion in the second quarter of 2018, up $12.1 billion (25.1%) from a year ago and a new quarterly record. Only 3.8% of institutions were unprofitable during the quarter, down from 4.3% in second quarter 2017. The average return on assets was 1.37%, up from 1.13% a year earlier, most of it again thank to Trump's tax law.
The improvement in earnings was mostly attributable to higher net interest income and a lower effective tax rate, which contributed more than $6 billion to the bottom line. Assuming the effective tax rate before the new tax law, net income would have totaled an estimated $53.8 billion, an increase of $5.6 billion (11.7%) from Q2 2017.
The FDIC reported that bank net interest income totaled $134.1 billion, an increase of $10.7 billion (8.7 percent) from 12 months earlier and the largest annual dollar increase ever reported by the industry. Specifically, more than four out of five banks (85.1%) reported year-over-year increases.
Meanwhile, net interest margin (NIM) rose fractionally to 3.38%, up 16 bps from a year earlier, as average asset yields grew more rapidly than average funding costs, although it wasn't clear if these numbers are actuals or pro forma.
One potential caution: institutions with assets of $10 billion to $250 billion reported the largest annual increase in average funding costs (up 30 basis points), as a result of the Fed's rising interest rates. Still, the improvement in NIM was widespread, as more than two out of three banks (70.2 percent) reported increases from a year earlier.
Noninterest income also increased but at a more modest pace, rising to $68.1 billion, an increase of $1.3 billion (2%) from the previous year. The 12-month increase in noninterest income was attributable to servicing fees (up $638.2 million, or 29.5 percent), fiduciary activity (up $558.4 million, or 6.3 percent), and net gains on sales of other assets (up $388.3 million). Slightly more than half of all institutions (55.6 percent) reported increases in noninterest income from a year earlier. Which also means that slightly less than half of all banks reported a decline.
Some more good news: total loan and lease balances increased by $104.3 billion (1.1%) from Q1, as more than three out of four banks (76.2%) reported quarterly increases, although that pace of increase may be in jeopardy: as we reported yesterday, there has been a sudden collapse in loan demand, reflecting rising interest rates even as banks loosened loan standards: if loan growth has finally topped and reversed, the broader is likely to follow.
Confirming that loan demand may be peaking, the FDIC's new Chair Jelena McWilliams said the new numbers show banks continue to grow, but she warned that competition for business could drive some institutions to take on more risk.
"The competition to attract loan customers will be intense, and it will remain important for banks to maintain their underwriting discipline and credit standards," she said. Translation: banks are about to unleash a flood of loan to anyone and anything that can fake a pulse.
For now, however, it's smooth sailing as all major loan categories registered quarterly increases, led by commercial and industrial loans (up $25.5 billion, or 1.2 percent); consumer loans, which include credit card balances (up $23.7 billion, or 1.4 percent); nonfarm nonresidential loans (up $18.9 billion, or 1.3 percent); and residential mortgage loans (up $17.9 billion, or 0.9 percent).
But the best news for bank employees is that after years of contraction, noninterest expenses rose by $5 billion (4.6 percent) from a year earlier, as salary and employee benefits grew by $2.7 billion (5.2 percent) while "other noninterest expense" increased by $1.8 billion (4.2 percent).
Average assets per employee totaled $8.4 million for the current quarter, up from $8.2 million in second quarter 2017. The efficiency ratio (noninterest expense as a percent of net operating revenue) improved to 55.5 percent in the second quarter, the lowest level since first quarter 2010.
Predictably, the US banking industry continues to shrink: while two new bank charters were added in the second quarter, 64 institutions were absorbed by mergers (no banks failed in Q2): as a result, the number of FDIC-insured commercial banks and savings institutions declined by 65 to 5,542. According to the FDIC, the number of problem banks monitored by regulators fell to 82 in the second quarter, from 92 in the first. That is the lowest number since the fourth quarter of 2007. Assets of problem banks declined from $56.4 billion to $54.4 billion.
Finally, despite another quarter of record earnings, the market continues to be concerned about the global systematically important banks (G-SIFI) pushing the aggregate stock price of the sector to a one year low.