The U.S. banking industry's earnings continued to rise in the second quarter, as banks set aside less money to guard against losses and boosted lending, according to data released on Tuesday by the Federal Deposit Insurance Corp.
But revenue growth remained sluggish, said FDIC Acting Chairman Martin Gruenberg, as JPMorgan's now infamous trading loss took a bite out of the industry's revenue.
The FDIC quarterly report showed the industry earned $34.5 billion in the second quarter, up $5.9 billion, or 20.7 percent, from a year earlier. The amount banks set aside to guard against losses reached a five-year low, declining $5 billion or 26.2 percent from the second quarter of 2011.
Banks boosted lending during the second quarter by $102 billion or 1.4 percent, after curbing lending in the first quarter. FDIC Acting Chairman Martin Gruenberg called the shift "encouraging."
"The banking industry continued to make gradual but steady progress toward recovery in the second quarter," Gruenberg said. But he cautioned that, "we will have to wait and see if the trend toward increased lending can be sustained."
Gruenberg also highlighted the banking industry's paltry revenue growth, with net operating revenues increasing only $1.3 billion, or 0.8 percent over the same quarter last year.
A $4.7 billion decline in trading income, led by the JPMorgan trading loss, partially explained the weakness, he said.
JPMorgan's trading results, "certainly impacted the results ... Without that I think it would have been clearly a stronger picture," he said.
In May, JPMorgan Chief Executive Jamie Dimon revealed that a botched hedging strategy had morphed into a risky bet, estimated to have cost the bank at least $5.8 billion.
Overall, bank earnings also continue to face pressure from slim interest rate margins, which decreased in the second quarter from a year ago. "In the current environment of extremely low interest rates, older, higher-yielding assets are maturing, and are being replaced by lower yielding investments," Gruenberg said.
Troubled loans, those 90 days past due, fell again for the ninth quarter in a row, decreasing by 12.9 billion or 4.2 percent, the FDIC said.
James Chessen, chief economist at the American Bankers Association, said the industry is gaining strength. But, he said, lingering barriers to borrowing hamper banking and economic growth.
"One of the consequences of really low interest rates is borrowers know there is no urgency to borrow. They can wait for the next two years and see what happens with the debt levels in the U.S., what happens to their foot traffic," he said.
Gruenberg also said it would be up to Congress to decide whether to extend a financial crisis-era temporary deposit insurance program aimed at reassuring business holders of transaction accounts. Lawmakers extended the program for two years as part of the 2010 Dodd-Frank financial reform law, and it is now set to expire at the end of 2012. Bank groups say the program should be extended for another two years.
"We've said all along that it was the financial stability considerations that brought the program into being in 2008," Gruenberg said. "We think that really should be the basis for the judgment going forward."
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