December 28, 2012

Fewer US banks failing as industry strengthens

More people are taking out – and repaying – loans, which means banks are earning more and lending a bit more freely.

The Associated Press

WASHINGTON — U.S. banks are ending the year with their best profits since 2006 and fewer failures than at any time since the financial crisis struck in 2008. They're helping support an economy slowed by high unemployment, flat pay, sluggish manufacturing and anxious consumers.

click image to enlarge

In this Wednesday, Dec. 19, 2012 photo, a man walks past a Wells Fargo location in Philadelphia. U.S. banks are closing the year with the strongest profits since 2006 and fewer failures than at any time since the financial crisis struck in 2008. They're helping support an economy slowed by high unemployment, flat pay, sluggish manufacturing and anxious consumers. (AP Photo/Matt Rourke)

AP

As the economy heals from the worst financial crisis since the Great Depression, more people and businesses are taking out — and repaying — loans.

And for the first time since 2009, banks' earnings growth is being driven by higher revenue — a healthy trend. Banks had previously managed to boost earnings by putting aside less money for possible losses.

Signs of the industry's gains:

— Banks are earning more. In the July-September quarter, the industry's earnings reached $37.6 billion, up from $35.3 billion a year earlier. It was the best showing since the July-September quarter of 2006, long before the financial meltdown. By contrast, at the depth of the Great Recession in the last quarter of 2008, the industry lost $32 billion.

— Banks are lending a bit more freely. The value of loans to consumers rose 3.2 percent in the 12 months that ended Sept. 30 compared with the previous 12 months, according to data from the Federal Deposit Insurance Corp. More lending fuels more consumer spending, which drives about 70 percent of economic activity. At the same time, overall lending remains well below levels considered healthy over the long run.

— Fewer banks are considered at risk of failure. In July through September, the number of banks on the FDIC's confidential "problem list" fell for a sixth straight quarter. These banks numbered 694 as of Sept. 30 — about 9.6 percent of all federally insured banks. At its peak in the first quarter of 2011, the number of troubled banks was 888, or 11.7 percent of all federally insured institutions.

— Bank failures have declined. In 2009, 140 failed. In 2010, more banks failed — 157 — than in any year since the savings and loan crisis of the early 1990s. In 2011, regulators closed 92. This year, the number of failures has trickled to 51. That's still more than normal. In a strong economy, an average of only four or five banks close annually. But the sharply reduced pace of closings shows sustained improvement.

— Less threat of loan losses. The money banks had to set aside for possible losses fell 15 percent in the July-September quarter from a year earlier. Loan portfolios have strengthened as more customers have repaid on time. Losses have fallen for nine straight quarters. And the proportion of loans with payments overdue by 90 days or more has dropped for 10 straight quarters.

"We are definitely on the back end of this crisis," says Josh Siegel, chief executive of Stonecastle Partners, a firm that invests in banks.

The biggest boost for banks is the gradually strengthening economy. Employers added nearly 1.7 million jobs in the first 11 months of 2012. More people employed mean more people and businesses can repay loans. And after better-than-expected economic news last week, some analysts said the economy could end up growing faster in the October-December quarter — and next year — than previously thought.

That assumes Congress and the White House can strike a budget deal to avert the "fiscal cliff" — the steep tax increases and spending cuts that are set to kick in Jan. 1. If they don't reach a deal, those measures would significantly weaken the economy.

(Continued on page 2)

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