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Bank Earnings Rise, but Not Real Estate Lending

NEW YORK ( TheStreet) -- The Federal Deposit Insurance Corporation reported that the banking system earned $42.2 billion in the second quarter of 2013, up 22.6% from the second quarter of 2012. The drivers of this improved profitability continue to be noninterest income and reduced loan loss provisions, not increased lending.

This morning I read a post on Seeking Alpha that indicated that the larger regional banks including Bank of America (BAC - Get Report), JP Morgan (JPM) and Wells Fargo (WFC) have been experiencing reduced demand for mortgages due to rising interest rates. Bank of America announced plans to cut about 2,000 jobs from its mortgage origination business. JP Morgan expects to lose money on its mortgage operations in the second half of 2013. Wells Fargo expects its mortgage originations to decline by nearly 30% in the second half of the year. This slippage was already noticeable in the FDIC QBP for the second quarter of 2013.



Source: Courtesy of FDIC

For the third quarter in a row net interest income posted a year-over-year decline. The decline for the second quarter was $1.8 billion as interest income from loans and other investments. This implies that the banking system remains reluctant to lend as long as troubled assets remain on the books of many banks.

A Review of the Sequential Mix of Real Estate Assets first quarter 2003 vs. second quarter 2013:

Total Assets On Monday I wrote, JP Morgan Upgraded As Banking System Heals and indicated that JP Morgan reduced assets by $47.5 billion in the second quarter, which pulled total assets in the banking system down $14.8 billion sequentially.

Residential Mortgages declined by $22.1 billion in the second quarter which is a sign that mortgage credit guidelines remain too tight, and that demand for mortgages have declined as rates rise.

Nonfarm Nonresidential Real Estate Loans rose by $11.1 billion in the in the second quarter which is a sign that banks feel saver lending to builders of office buildings, strip malls, condos and apartments, rather than single-family homes.

Construction & Development Loans rose by $897 million in the in the second quarter which is a sign that banks are beginning to be less stingy to community developers and homebuilders. However C&D loans are still likely to include the majority of noncurrent loans.

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