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American banks in best state since start of financial crisis

By Associated Press


WASHINGTON » U.S. banks are ending the year with their best profits since 2006 and fewer failures than at any time since the financial crisis struck in 2008. They're helping support an economy slowed by high unemployment, flat pay, sluggish manufacturing and anxious consumers.

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, long before the financial meltdown. 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. More lending fuels more consumer spending, which drives about 70 percent of economic activity. 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 early 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.

The biggest boost for banks is the gradually strengthening economy. Employers added nearly 1.7 million jobs in the first 11 months of 2012. More people employed mean more people and businesses can repay loans. And after better-than-expected economic news last week, some analysts said the economy could end up growing faster in the October-December quarter — and next year — than previously thought.

That assumes Congress and the White House can strike a budget deal to avert the "fiscal cliff" — the steep tax increases and spending cuts that are set to kick in Tuesday. If they don't reach a deal, those measures would significantly weaken the economy.

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.

"This interest-rate pressure on the banks becomes very difficult to overcome," says Fred Cannon, chief equity strategist and director of research at Keefe, Bruyette & Woods. "It's a big head wind for banks."

Many banks have reported lower net interest margin — the difference between the income they receive from loans and the interest they pay depositors and other lenders. It's a key measure of a bank's profitability.

The industry's average net interest margin fell to 3.43 percent in the third quarter from 3.56 percent a year earlier.

Some big banks have also cautioned that their earnings are up mainly because they've shed jobs, bad loans and weak businesses rather than because of an improved economy. They include JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. All managed to recover from the financial crisis in part because of federal aid.

Small and midsize 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-size banks have recovered.

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nodaddynotthebelt wrote:
Sure, the US banks have done better. How can they not when they have reduced the interest for the money that we placed in their hand for a fraction of a percent on the dollar which they in turn lend at a high rate. Just look to the CD rates just as an indicator for what the banks pay us to hold our money and you will see how they have gauged us. A one year cd will only yield you approximately .77 of a percent. And that's after we bailed them out. Of course some of the numbers are affected by the Feds but still it explains their boon.
on December 29,2012 | 11:14AM
cojef wrote:
Too big to fail is the mantra, especially with B of A , when they merged with Merril Lynch and agreeing to pay the the officer $billions in bonuses after driving ML in the ground, without disclosing the fact to stockholders and subsequently requested a bail-out from the Federal Government. It is currrently in litigation and agreed to settle by paying the plaintiffs $2,450,000,000. Mom and Pop business are not able to get such bail-outs, is the irony. Politicians are not afraid to use taxpayers' money for bail-outs, even after the excecutive drove business into ground and drawing exorbitant bonuses.
on December 29,2012 | 12:02PM
cunfuzd4 wrote:
Time to move to a Credit Union.
on December 30,2012 | 05:41PM
mcc wrote:
The economy is stagnant because of greed by banks. The banks have made it more difficult to close on a 30 yr. loan at 4% than it is to close on a credit card loan at 18% or 24%. This in turn slows the economy as the buyer does not get into his home and spend money to fix it up and the seller does not have his money to further invest. The loan officer does not have his money to pay his bills and the realtor does not have his money to pay his bills. Meanwhile, the banks thrive on credit card loans, and reverse mortgages another greedy lending strategy by the greedy banks.
on December 30,2012 | 05:52PM
HD36 wrote:
If the banks are in such good shape, why does the Federal Reserve have to buy $40 billion dollars worth of mortgage backed securities a month and $45 billion dollars worth of long term US Treasuries a month. This after they have already printed money with QE1, QE2, Operation Twist, and QE3 unlimited? Why have they left out the possiblilty that interest rates will rise to normal rates in the stress tests? Why, because if they rise to normal rates, it's bailout time again.
on December 30,2012 | 09:21PM
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