US Bank Profits Surge, but Watchdog Warns of Potential Stress – Reuters

By Pete Schroeder

WASHINGTON – The U.S. banking sector reported increased profits in the second quarter of 2024, yet the Federal Deposit Insurance Corporation (FDIC) highlighted several ongoing concerns, particularly in commercial real estate and credit card borrowing.

According to the regulator, profits for the banking industry surged by 11.4%, reaching $71.5 billion in the second quarter, largely driven by decreased expenses and an increase in non-interest income. However, the FDIC cautioned that indicators of stress in the commercial real estate sector and credit card debt had escalated to levels unseen in a decade.

FDIC Chairman Martin Gruenberg noted in a press conference, "This quarter reflects the continuation of trends observed in recent quarters—industry stability and resilience, accompanied by underlying vulnerabilities."

The FDIC specifically pointed out that the non-current rate for non-owner occupied commercial real estate loans, particularly from office portfolios at major banks, increased to 1.77%, the highest it has been since 2013. Bank supervisors are closely monitoring this sector for signs of weakness, as banks and borrowers deal with increased vacancies due to the shift toward remote work during the pandemic.

A noteworthy aspect, according to the FDIC, is that while the largest banks face the highest levels of noncurrent commercial real estate loans, these loans represent a relatively smaller portion of their overall portfolios.

On the consumer side, the net charge-off rate for credit cards—indicative of the portion of credit card balances that banks do not anticipate collecting—rose to 4.82%, marking its highest level since 2011.

Additionally, the FDIC reported that three new banks were added to its "Problem Bank" list, which designates institutions identified by supervisors as having weak private ratings. This brings the total number of banks on the list to 66, with assets amounting to $83 billion. These banks constitute 1.5% of all banks in the industry, and the FDIC noted that it is common for problem banks to represent 1-2% of the total during stable periods.

Bank profits benefited from reduced expenses, particularly a $4 billion decline in expenditures related to the special assessment banks must pay to assist the FDIC in recovering costs from the 2023 bank failures.

Moreover, profits were bolstered by $10 billion in one-time gains from equity security transactions. Non-interest expenses decreased by 2.4% in the quarter, although provisions for potential losses increased, especially for larger banks, with an uptick of $3.3 billion, or 30.3%, compared to the previous quarter.