A Glimmer Of Hope

The American Bankers Association sees positive signs in third quarter earnings. “The banking industry posted another solid quarter with a broad-based expansion in lending and a further improvement in asset quality,” said James Chessen, ABA chief economist. “Capital hit a record high as banks continue to aggressively reinforce the support backing every loan on their books.”

Consumer and Business Lending Shows Broad-Based Improvement

“We continue to see a broad-based growth in lending to both consumers and businesses. Loans to individuals are increasing, buoyed by a strong growth in automobile lending. Banks continue to increase lending to small businesses, and community banks are playing a critical role in meeting that need. The expansion in lending reflects a rising confidence among households and businesses that an improving economy will better enable them to meet their financial obligations,” Chessen pointed out.

Mortgage Lending Continues to Suffer from Excessive Regulation

“It’s painfully clear that new regulatory requirements have restrained mortgage lending and have made it particularly difficult for first-time homebuyers. The complex and liability-laden maze of compliance has made originations very hard to make, especially to borrowers with little or weak credit history,” Chessen added.

Earnings Remain Solid

“While net income remains near a record high, ever-increasing compliance and regulatory costs have cut sharply into earnings. Stronger lending trends are promising as controlling expenses can only be pushed so far. As the economy improves and loan volumes pick up, it’s prudent for banks to increase loan loss provisions. While this can be a drag on earnings, it ensures that banks are prepared for any economic circumstance that could arise,” Chessen noted.

Interest Rate Risk Front and Center for Banks

“Interest rate risk is front and center for bankers as the Fed’s interest rate liftoff nears. This is one of many risks banks must manage, balancing customer demands for longer-term, low-interest loans against the negative impact of rising rates on funding costs,” Chessen continued.

Asset Quality Continues to Improve

“Problem loans are back to levels we saw six years ago, and losses have returned to pre-crisis levels as banks continue to improve their portfolios. The level of non-performing loans is down more than 58 percent since its peak in the first quarter of 2010. While asset quality remains strong, we may have reached the bottom of the credit cycle as the process of purging bad loans nears the finish line,” Chessen stressed.

High-Quality Capital Continues to Grow

“Capital in the industry is at record levels, providing tremendous support in an expanding economy and a strong foundation to absorb losses in a downturn. Building high-quality capital has been a priority for banks, with the current level 33 percent higher than in 2008. Total industry capital is now over $1.7 trillion, and with reserves banks have set aside for possible loan losses, there is a total buffer protecting the industry of over $1.8 trillion,” Chessen concluded.

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