US banks generated record first-quarter profits despite turmoil

Profits in the US banking sector reached an all-time high of roughly $80bn in the first quarter, up 33 per cent from a year ago, even as the industry contended with the aftermath of two bank failures and the most significant stress since the 2008 financial crisis.

The banking turmoil was in large part responsible for the bumper haul. About half of the increase in the industry’s aggregate profits came from one-time gains recorded by First Citizens and Flagstar, which bought the remnants of Silicon Valley Bank and Signature Bank, respectively, after they were seized by regulators and sold off at a discount in March.

Even so, the jump in profits also showed US banks in general benefited from rising interest rates, low loan defaults and an expanding job market despite nervousness among depositors and investors.

“Most of the industry is not failing,” said Bert Ely, an independent banking consultant. “The economy is still in pretty good shape, and that’s what would account for those profits.”

Of the nation’s nearly 4,400 banks, just 197 — or less than 5 per cent — made losses in the first quarter, according to BankRegData, a data provider that collates quarterly reports made by lenders to the Federal Deposit Insurance Corporation. The “call reports” include a statement of net income that adheres to generally accepted accounting principles.

JPMorgan Chase, the nation’s largest bank by assets, had the highest profit of any lender, earning $11.7bn in the quarter from activities including lending and payment processing, up from $6.4bn in the same three months a year earlier. This figure does not capture profits made by JPMorgan that do not flow through its FDIC-regulated entity.

PacWest, however, lost $1.2bn, more than any other lender in the first three months of 2023. The California bank last week said it had hired advisers to review its strategic options. Silvergate Bank, which lost $538mn in the first three months of the year, second only to PacWest, announced it was shutting down in early March.

However, in a sign that the bumper profits are unlikely to continue, the aggregate interest expense for all banks jumped 10 fold from a year ago to $85bn in the first quarter, according to BankRegData. That is because banks, particularly since March, have had to pay higher rates to depositors.

“Bottom lines look pretty good for the first quarter, but they will not look good for the rest of the year,” said Christopher Whalen, a bank analyst and head of Whalen Global Advisors.

Whalen said every lender has had to raise the amount of interest they pay to depositors following the failure of SVB. “The cost of funds for banks is going to go way up. It’s going to shock people.”

Delinquencies in a crucial segment of commercial real estate — loans tied to properties that are not occupied by their owners — rose by a third in the first quarter to $12bn, which was the highest since 2020, the data showed.

Many depositors fled for safety in the first quarter. The volume of deposits held in accounts covered by the FDIC’s insurance fund jumped by $400bn in the first three months of the year. At the end of March, the federal Deposit Insurance Fund backed $10.4tn in consumer deposits, an all-time high.

“Loan growth is more negative than it was a few months ago, and that impacts growth expectations,” said Alexander Yokum, an analyst who follows regional banks at CFRA Research. “I am not expecting much growth at all from regional banks over the next few quarters.”

The data prepared by BankRegData comes from the quarterly call reports that listed and privately held banks must file with the FDIC, which is expected to release a report based on the filings later this month. The data offers an early glimpse of that report, which could be different if adjustments are made before then. At least one medium-sized lender, the US branch of Banco Popular, has not yet submitted its report.

Profits at First Citizens, which in late March won a FDIC-brokered auction to take over SVB’s banking business, soared to $9.5bn in the first quarter, up from $273mn a year ago, according to the data. That made First Citizens the nation’s second most profitable bank in the quarter, just behind JPMorgan.

The bank reports first-quarter profits on Wednesday.

Net income at Flagstar, which acquired much of the deposits and all of the branches of Signature Bank in mid-March, rose to $2bn, up from about $164mn a year ago. Flagstar is a subsidiary of New York Community Bancorp. Shares of both banks soared after the deals were announced.

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