Monday, December 11, 2017
Business

Fewer U.S. banks failing as industry improves

WASHINGTON — U.S. banks are ending the year with their best profits since 2006 and fewer failures than since the financial crisis struck in 2008.

As the economy heals from the worst financial crisis since the Great Depression, more people and businesses are taking out — and repaying — loans.

And for the first time since 2009, banks' earnings growth is being driven by higher revenue — a healthy trend. Banks had previously managed to boost earnings by putting aside less money for possible losses.

Signs of the industry's gains:

Banks are earning more: In the July-September quarter, the industry's earnings reached $37.6 billion, up from $35.3 billion a year earlier. It was the best showing since the July-September quarter of 2006. By contrast, at the depth of the Great Recession in the last quarter of 2008, the industry lost $32 billion.

Banks are lending a bit more freely: The value of loans to consumers rose 3.2 percent in the 12 months that ended Sept. 30 compared with the previous 12 months, according to data from the Federal Deposit Insurance Corp. At the same time, overall lending remains well below levels considered healthy over the long run.

Fewer banks are considered at risk of failure: In July through September, the number of banks on the FDIC's confidential "problem list" fell for a sixth straight quarter. These banks numbered 694 as of Sept. 30 — about 9.6 percent of all federally insured banks. At its peak in the first quarter of 2011, the number of troubled banks was 888, or 11.7 percent of all federally insured institutions.

Bank failures have declined: In 2009, 140 failed. In 2010, more banks failed — 157 — than in any year since the savings and loan crisis of the 1990s. In 2011, regulators closed 92. This year, the number of failures has trickled to 51. That's still more than normal. In a strong economy, an average of only four or five banks close annually. But the sharply reduced pace of closings shows sustained improvement.

Less threat of loan losses: The money banks had to set aside for possible losses fell 15 percent in the July-September quarter from a year earlier. Loan portfolios have strengthened as more customers have repaid on time. Losses have fallen for nine straight quarters. And the proportion of loans with payments overdue by 90 days or more has dropped for 10 straight quarters.

"We are definitely on the back end of this crisis," says Josh Siegel, chief executive of Stonecastle Partners, a firm that invests in banks.

Banks have also been bolstered by higher capital, their cushion against risk. Banks boosted capital 3.8 percent in the third quarter, FDIC data show. And the industry's average ratio of capital to assets reached a record high.

On the other hand, many banks are no longer benefiting from record-low interest rates. They still pay almost nothing to depositors and on money borrowed from other banks or the government. But steadily lower rates on loans other than credit cards have reduced how much banks earn.

Small and midsized banks have taken longer to rebound. They held risky commercial real estate loans used to develop malls, industrial sites and apartment buildings. Many such loans weren't repaid. But as the economy has strengthened, fewer such loans have soured, and many small and medium-sized banks have recovered.

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