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U.S. Banks Earn $40.3 Billion During Fourth Quarter

NEW YORK (TheStreet) -- The health of the U.S. banking industry is continuing to improve, although the hostile interest rate environment is placing a drag on operating revenue.

The Federal Deposit Insurance Corp. on Wednesday said U.S. banks earned $40.3 billion during the fourth quarter, increasing from $36.0 billion in the third quarter and from $34.4 billion during the fourth quarter of 2012.

The sequential improvement mainly reflected a rough third quarter for JPMorgan Chase Bank, NA (the main subsidiary of JPMorgan (JPM)), which earned only $401 million, when JPM at the holding company level saw its pretax earnings lowered by $9.15 billion from provisions for litigation expenses. That was preparation for the holding company's $17.5 billion in fourth-quarter residential mortgage-backed securities settlements with government authorities and private investors.

JPMorgan Chase, NA bounced back with fourth-quarter earnings of $4.8 billion.

The FDIC said industry earnings had risen year-over-year during 17 out of the last 18 quarters, with the third quarter being the exception, because of the weak quarter for JPMorgan Chase, NA, although the regulator didn't mention that bank by name.

The year-over-year improvement in the industry's aggregate earnings "was mainly attributable to an $8.1 billion decline in loan loss provisions," the FDIC said. A loan loss provision is the amount a bank sets aside each quarter to cover anticipated loan losses. A negative provision means the bank transferred money from reserves. Here's how those numbers stack up for the nation's four largest banks, according to data provided by Thomson Reuters Bank Insight:

JPMorgan Chase Bank, NA (transferred $315 million from loan loss reserves during the fourth quarter, which boosted its pretax earnings. A year earlier, the bank transferred $117 million from reserves.

Bank of America NA (the main banking subsidiary of Bank of America (BAC - Get Report)) transferred $84 from loan loss reserves during the fourth quarter, seeing its own pretax earnings boost, compared to a provision for loan losses of $1.256 billion during the fourth quarter of 2012.

Wells Fargo Bank NA (held by Wells Fargo (WFC)) reported a fourth-quarter provision for loan loss reserves of $296 million, compared to $$1.487 billion during the fourth quarter of 2012.

For Citibank NA, the main subsidiary of Citigroup (C - Get Report), the fourth-quarter provision for loan losses was $1.214 billion, improving from $2.144 billion a year earlier.

That's a total of $3.7 billion in industry operating earnings improvement just for the main banking units of the "big four" U.S. bank holding companies.

On an aggregate basis, the U.S. banking industry's fourth-quarter return on assets was 1.10%, improving from 0.96% a year earlier, while the aggregate return on equity was 9.87%, increasing from 8.53% in the fourth quarter of 2012.

But the news was not all good. The industry's net operating revenue - net interest income plus noninterest income - was down 1.7% year-over-year to $166.1 billion during the fourth quarter, reflecting a decline in mortgage volume, as well as weakening trading revenue.

Industry noninterest income was down 6.6% from a year earlier to $59.7 billion during the fourth quarter.

While rising long-term interest rates curtailed the wave of mortgage refinancing activity and lowered noninterest income, net interest income for the banking industry rose 1.3% year-over-year to $106.4 billion during the fourth quarter.

The industry's net interest margin for the fourth quarter was 3.28%, which was the highest for any quarter during 2013, but was down from 3.34% in the third quarter of 2012. Rising long-term interest rates helped relieve some pressure on net interest margins, however, with the Federal Reserve continuing to keep its target for the short-term federal funds rate in a historically low range of zero to 0.25%, banks are still seeing various asset types reprice at lower rates.

"The trend of slow but steady improvement that has been underway in the banking industry since 2009 continued to gain ground," said FDIC Chairman Martin Gruenberg in a press release.

"However, challenges remain in the industry," he added. "Narrow margins, modest loan growth, and a decline in mortgage refinancing activity have made it difficult for banks to increase revenue and profitability."

Other signs of improving industry health included a reduction in the percentage of unprofitable U.S. banks to 12.2% in the fourth quarter from 15.0% a year earlier, and a reduction in the number of banks on the FDIC's list of "problem institutions" to 467 at the end of 2013 from 651 at the end of 2012.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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