Categories: OLD Media Moves

Bank profits rise on lending

It looks like banks are going to be solidly in the black this quarter. And that’s a good thing for borrowers and corporations. Here’s the story from the Wall Street Journal:

For the first time in three years, banks are getting a larger boost to their profit from traditional sources of revenue than from simply cutting back on funds set aside for bad loans.

Banks’ overall revenue rose 3% in the third quarter from a year earlier, to $169.6 billion, the largest gain in nearly three years, according to data released Tuesday by the Federal Deposit Insurance Corp.

This revenue growth helped propel the industry to the fattest quarterly profit in six years. Total profit of $37.6 billion, was up 6.6%, or $2.3 billion, from the same quarter a year earlier.

Still, the nation’s 7,181 banks and thrifts face numerous challenges stemming from the weak economic recovery. While low interest rates have spurred a surge in refinanced mortgage loans, the Federal Reserve’s low-rate policy is making it harder for banks to make money, analysts say.

“For every dollar a bank lends, it’s earning less on that loan,” said Tyler Hall, an analyst at SNL Financial. To boost their profits further, banks “are going to have to figure out ways to earn more on their loans or look to alternative sources of revenue,” he said.

In the search for alternative revenue, much of it seems to be coming from mortgages. Here’s Fortune’s story:

Much of the improvement, though, appears to be coming from loans sales, and much of those profits appear to be coming from the mortgage business. Wells Fargo (WFC), for instance, made $248 million selling residential home loans predominantly to Fannie and Freddie in the third quarter. That compares to a loss of $75 million for all other loan sales.

In all, banks made $5.6 billion off loan sales, up 227% from a year ago. That’s the most banks have made off that business in any three month period since the FDIC began tracking that number more than a decade ago. By comparison, interest income, which is what the banks make from the loans and investments they hang onto, rose just $700 million, or less than 1%.

The notion that banks are making record profits off mortgages at a time when borrowers are paying record low rates for new loans may seem odd. The reason has to do with the fact that banks rarely hang onto their mortgages. Instead, they sell off the majority of those loans shortly after closing them, these days to Fannie and Freddie.

Typically, banks make a small profit, around 0.3% of the loan value on those mortgage sales. But recently, the spread between what banks charge for home loans and what they can sell them for with the assistance of Fannie and Freddie has risen to about 1.8 percentage points. Paul Miller, a bank analyst at FBR Capital Markets, says the profit margins for the banks are even larger when they do government-sponsored mortgage modifications.

The L.A. Times points out that some aren’t as excited about the rise in profits.

Consumer and labor advocates insisted, though, that it was time for the banks, having benefited from the government bailout, to do more.

“We’re still seeing lenders focused mainly on de-risking,” said Brandon Rees, acting director of the AFL-CIO‘s office of investment, which advises union pension plans. “The fact is, banks are not playing their historic role of delivering capital to small businesses and consumers.”

Tom Feltner, director of financial services at the Consumer Federation of America, said, “As many banks turn the corner, I think it’s important for them to take a good look at the terms and conditions of their retail accounts and make sure they’re inclusive and not abusive.”

Banks should quit offering short-term, high-interest loans similar to those of payday lenders, he said, and reduce the minimum deposit requirements for fee-free checking.

But the good news is that banks are actually making money from doing business instead of reducing bad loan provisions. Here’s the final take from the WSJ:

In recent quarters, the industry had drawn most of its earnings improvement from smaller provisions to cover bad loans, and officials had flagged the trend as a concern. But in the third quarter, provisions for loan losses fell by 20.6%, to $14.8 billion, from a year earlier.

During the quarter, 12 banks failed, the smallest number since the fourth quarter of 2008. The FDIC said 694 institutions were on the agency’s “problem” list at the end of September, the lowest level since the third quarter of 2009.

And if banks are healthier, it’s better for everyone.

Liz Hester

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