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The US banking sector is on fire

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11/21/2018 | 06:19am EDT

Two reports published this week show that the American banking industry is doing very well. This is good news, but these reports also remind us that what goes up must come down…

The US banking industry is in good shape, according to the Federal Deposit Insurance Corporation (FDIC), an independent agency created by the US Congress to maintain stability and confidence in the financial system by insuring deposits.

In a new report, it revealed that the sector posted strong financial results for the third quarter of 2018. Commercial banks and savings institutions insured by the FDIC saw their aggregate net income jump by 29.3 percent from the same quarter a year ago to $62 billion. It said this was due to higher net operating revenue and a lower effective tax rate.

Furthermore, of the 5,477 insured institutions reporting third quarter financial results, more than 70 percent reported year-over-year growth in quarterly earnings. The report also shows that the proportion of unprofitable banks in the third quarter declined to 3.5 percent, from 4 percent a year ago.

Source : FDIC

“Loan balances grew, net interest margins improved, and the number of ‘problem banks’ continued to decline," the FDIC said. In addition, 5,044 FDIC-insured community banks in the United States reported 6.8 billion US dollars in net income during the third quarter, reflecting a 21.6 percent increase from a year earlier. Loan growth and a net interest margin in community banks even surpassed the overall industry.

At the same time as the FDIC report, another report from Peer IQ is also good news for the sector. Top executives at the biggest US banks are very upbeat about the health of the consumer.

Everything’s fine until it’s not

These reports are great news, but is it sustainable? “The good news - and the bad news - is that conditions don’t get better than they are now,” Ram Ahluwalia, chief executive officer of PeerIQ, said in an interview with Bloomberg. “When you’re at full employment, it’s very difficult to find other sustainable drivers of growth. We also have rising rates and a flat yield curve.”

FDIC Chairman Jelena McWilliams also warns that while the performance results were strong in Q3, the extended period of low interest rates and the competition to attract loan customers have led to heightened exposure to interest-rate risk, and credit risk. This is why it recommends that “banks must maintain prudent management of these risks in order to sustain lending through the economic cycle."

The PeerIQ reports shows that many lenders are taking precautions such as increasing loan-loss provisions, especially among credit-card issuers. For example, American Express increased reserves 29 percent in the third quarter even though loan growth was just 16 percent, while Goldman Sachs raised its provisions more than 170 percent from a year earlier…

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Romain Fournier
© MarketScreener.com 2018
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