FDIC-Insured Banks' Q2 Earnings Up on Higher NII, Deposits Fall

The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported second-quarter 2023 earnings of $70.8 billion, rising 9.9% year over year. The increase was primarily attributable to an improvement in net interest income, which was more than offset by the rise in provisions and non-interest expenses.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the June-ended quarter. Though such banks constitute only 3% of the total number of FDIC-insured institutes, these account for approximately 80% of the industry’s earnings. Some of the notable names in this space are JPMorgan JPM, Bank of America BAC, Citigroup C and Wells Fargo WFC.

At present, JPMorgan sports a Zacks Rank #1 (Strong Buy), while Bank of America, Citigroup and Wells Fargo carry a Zacks Rank #3 (Hold).

A rise in net operating revenues driven by growth in net interest income (NII) and non-interest income acted as a major tailwind. Also, higher interest rates and decent loan demand offered some support.

Nonetheless, banks’ earnings were adversely impacted by higher provisions on expectations of a deteriorating operating backdrop. Further, a rise in non-interest expenses, higher funding costs and lower deposit balance were headwinds.

Community banks, constituting 91% of all FDIC-insured institutions, reported a net income of $7.1 billion, up almost 1% year over year.

The return on average assets in second-quarter 2023 rose to 1.21% from 1.08% as of Jun 30, 2022.

Net Operating Revenues & Expenses Rise

Net operating revenues came in at $252.5 billion, up 10.7% year over year.

NII was $174.3 billion, increasing 15.4% year over year. Net interest margin (NIM) jumped 48 basis points (bps) to 3.28%, which is above the pre-pandemic average of 3.25%. JPMorgan, Bank of America, Citigroup and Wells Fargo also witnessed an increase in NIM.

Non-interest income grew 1.7% to $78.2 billion.

Total non-interest expenses were $141.9 billion, increasing 5.2%. The rise was mainly due to higher compensation expenses and “all other noninterest expense.”

Despite the rise in expenses, the banking industry recorded a fall in efficiency ratio to 55.7% in the second quarter from 58.7% in the prior-year quarter. This was largely driven by “strong growth in net interest income.”

Credit Quality Deteriorating

Net charge-offs (NCOs) for loans and leases were $14.7 billion, surging substantially year over year. NCO rate was 0.48% in the second quarter, up 25 bps from the prior-year quarter. The NCO rate is now equal to the pre-pandemic average.

Provisions for credit losses were $21.5 billion during the second quarter, jumping 93.7% from the year-ago quarter. Several lenders, including JPMorgan, Bank of America, Citigroup and Wells Fargo, reported higher provisions.

Loans Rise, Deposits Fall

As of Jun 30, 2023, total loans and leases were $12.3 trillion, almost 1% up from the prior quarter. The rise was majorly attributable to higher credit card loan balances and “loans to nondepository financial institutions.”

Total deposits amounted to $18.64 trillion, down marginally sequentially, mainly due to a 2.5% fall in uninsured deposits. This marked the fifth consecutive quarterly decline.

Unrealized losses on securities were $558.4 billion, up 8.3% from the prior quarter.

As of Jun 30, 2023, the Deposit Insurance Fund (DIF) balance increased nearly 1% from the March 2023 level to $117 billion. A rise in the DIF was largely driven by assessment income of $3.1 billion.

One Bank Failure, Two New Banks

During the reported quarter, one bank – First Republic Bank – failed. It was acquired by JPMorgan in a FDIC-assisted deal worth $10.6 billion.

Further, two new banks were added, while 28 banks were absorbed following mergers.

As of Jun 30, 2023, the number of ‘problem’ banks was 43. Total assets of the ‘problem’ institutions decreased to $46 billion from $58 billion reported in the first quarter of 2023.


The FDIC Chairman Martin Gruenberg, said, “The banking industry still faces significant challenges from the effects of inflation, rising market interest rates, and geopolitical uncertainty. These risks, combined with concerns about commercial real estate fundamentals, especially in office markets, as well as pressure on funding levels and net interest margins, will be matters of continued supervisory attention by the FDIC.”

Though higher interest rates, decent loan demand and a changing revenue mix will offer much-needed support to banks’ top line, rising deposit costs will weigh substantially on it. This will likely lead to a contraction in net interest margins going forward. Also, a deteriorating macroeconomic environment is expected to hurt banks’ financials.
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