POSTED: 01:30 a.m. HST, Jul 06, 2012
WASHINGTON >> Fewer U.S. banks are failing than at any time since the financial crisis erupted in 2008. The healthier banking industry is helping sustain an economy slowed by lackluster hiring, weak manufacturing and Europe’s debt crisis.
Banks have benefited from low interest rates, higher account fees and more mergers. The recovery from the financial crisis has helped, too. It means more people and businesses can take out and repay loans.
Banks remain generally cautious about lending. And their rebound has yet to drive a robust economic recovery from the recession that officially ended three years ago. But the banks’ gains have allowed them to make gradually more loans and keep the economy from slowing further. Bank loans rose at a 2.1 percent annual rate in the first three months of 2012 and at a 4.6 percent rate since then, according to the latest Federal Reserve data.
Signs of the industry’s improvement:
>> Banks are making more money. In the first three months of 2012, the industry’s earnings reached $35 billion, up from $29 billion in the first quarter of 2011. It was the best showing since 2007.
>> Fewer banks are considered at risk of failure. In January through March the number of banks on the Federal Deposit Insurance Corp.’s confidential “problem” list fell for a fourth straight quarter. The list consists of banks considered at risk of failure. The list numbers 772 as of March 31 — about 9.5 percent of U.S. banks. At its peak in the first quarter of last year, the number was 888.
>> Bank failures are down. In 2009, 140 banks failed. In 2010 more banks failed — 157 — than in any year since the savings and loan crisis of the early 1990s. In 2011, 92 failed. This year, regulators closed 31 in the first half of the year. For the full year, they’re on pace to shut down about 60. That’s still more than normal.
>> Less fear of loan losses. The money banks must set aside for possible loan losses declined by nearly a third in the January-March quarter compared with a year earlier. Their loan portfolios have grown safer as more customers have repaid on time. FDIC figures show loan losses have fallen for seven straight quarters. And the proportion of loans with payments overdue by 90 days or more has dropped for eight straight quarters.
“The worst is over,” says Bert Ely, a banking consultant.
Consider San Francisco-based Wells Fargo & Co., the fourth-largest U.S. bank. Its net income in the first quarter was $4.25 billion. That was up from $3.76 billion in the first quarter of 2011 and $2.5 billion the year before that. Wells’ delinquent loans dropped as more borrowers repaid loans.
The main reason for the sharp drop in bank closings has been a stronger economy. Employers have added nearly 1.8 million jobs over the past year, which means more people and businesses have money to repay loans.
Also helping strengthen the banks:
>> Record-low interest rates. They’ve enabled banks to pay almost nothing to depositors and on money borrowed from other banks or the government. They’re paying an average of 0.5 percent on money-market accounts and interest checking accounts. Yet they charge their own borrowers much higher rates on credit cards and other loans. They’re taking in an average of about 16 percent on credit cards, 5.7 percent on home equity loans, 3.8 percent on auto loans and 3.6 percent on 30-year fixed-rate mortgages.
>> More bank mergers. Fifty-one bank mergers were announced in the first quarter, according to SNL Financial. That was up from 39 deals in the first quarter of 2011.
>> Higher capital levels. Banks have boosted their capital, the cushions they hold against risk. They increased it by nearly 4 percent in the first quarter, according to FDIC data. That raised the industry’s average ratio of capital to assets to 9.2 percent, matching the record-high ratio of the second quarter of 2011.
The industry’s rebound began in 2009 with the biggest U.S. banks, thanks to taxpayer bailout aid. Small and midsize banks have taken longer to rebound. They were saddled by high-risk real estate loans used to develop malls, industrial sites and apartment buildings. Many of those loans weren’t repaid. As the economy has strengthened, fewer loans have soured, and many smaller banks have recovered.
Past-due rates on commercial real estate loans began to decline last year. And banks have boosted the number of commercial loans they’ve been able to sell to investors.