Bank Profits Continue To Roll, But Undercurrents Exist

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Bank earnings rose sharply in the fourth quarter, the 17th straight quarterly year-over-year increase and showing strong a string of profitability since 2009.

Banks’ fourth quarter net up staggering $40.3 billion

Banks and savings and loans insured by the Federal Deposit Insurance Corporation (FDIC) earned a staggering $40.3 billion in the fourth quarter of 2013, up nearly 17% from a year ago, according to the FDIC.  Net income for 2013 was up 9.6% to $154 billion year over year.  More than 50 percent of the FDIC insured financial institutions reported a year-over-year growth in quarterly earnings, as the portion of unprofitable banks declined 2.8% to 12.2% in the fourth quarter.

While the headline number is strong, there are undercurrents to be considered.

Headline numbers belie issues

Most significant, the earnings improvement was largely due to an $8.1 billion reduction in loan-loss provisions, an accounting line item that banks estimate on their own.  Essentially the banks dropped their reserve for bad loans, which contributed to nearly 25% of the fourth quarter revenue.

Mortgage applications continue to slide

Another issue was the fact that mortgage applications continue to fall, with mortgage revenue lower year over year. Amidst rising interest rates, mortgage loans for one- to four-bedroom homes dropped 62% in the fourth quarter compared to the same period the year, the FDIC report noted.

“Narrow margins, modest loan growth, and a decline in mortgage refinancing activity have made it difficult for banks to increase revenue and profitability,” said FDIC Chairman Martin J. Gruenberg in a statement.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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