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FDIC: Banking Industry Earnings Fell Precipitously In 4Q

By Michael R. Crittenden

Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--Banking industry earnings fell to their lowest level since the fourth quarter of 1991, as firms wrote down the value of bad assets and set aside more money to account for a rapid increase in bad loans.

The Federal Deposit Insurance Corporation said Tuesday that banks reported fourth-quarter 2007 net income of $5.8 billion, 83.5% less than federally insured institutions reported in the fourth quarter of 2006. The agency said the problems were widespread, with more than half of all banks reporting lower net income during the fourth quarter when compared with the fourth quarter of 2006. One out of every four banks with assets greater than $10 billion reporting a net loss in the fourth quarter.

Full year results were similarly weak. Banks insured by the FDIC reported net income of $105.5 billion in 2007, a 27.4% decline from the record $145.2 billion earned by the industry in 2006. The agency said less than half of commercial banks and savings institutions reported increased net income for the year in 2007, a trend that could continue into 2008.

"Weakness in the housing sector and the credit squeeze in financial markets made it a very challenging time for many institutions. And we can expect those problems to continue in 2008," FDIC Chairman Sheila Bair said in a statement.

The most troubling figure for the banking industry is likely those loans that were at least 90 days past due. The FDIC said 1.39% of the industry's loans were noncurrent at the end of the fourth quarter, the highest level since the third quarter of 2002. The amount of noncurrent loans increased by 32.5% over the third quarter, the largest percentage increase in a single quarter in the 24 years for which data have been collected.

Residential mortgage loans continued to be the biggest problem for banks, but almost every type of loan saw a significant increase in the percentage of noncurrent loans during the quarter. The FDIC said 2.06% of residential mortgage loans were at least 90 days past due during the quarter - the highest level in the 17 years the data have been collected.

In a sign that the problems surrounding the housing market may be spreading, the number of noncurrent real estate construction and development loans increased 73.2% during the fourth quarter, while credit card loans that were at least 90 days past due climbed 26%.

Overall industry indicators were similarly dour. The industry's average return on assets fell to 0.86% for 2007, compared to 1.28% in 2006. The average net interest margin for banks - the difference between the average interest income banks earn on their loans and the average interest expense they pay to fund those assets - declined to 3.29 in 2007, from 3.31% in 2006. The FDIC said the 2007 result was the lowest since 1988 and it marked the sixth consecutive year that the industry's net interest margin has declined.

-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com

(END) Dow Jones Newswires

February 26, 2008 10:00 ET (15:00 GMT)


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