Third Quarter 2011 Earnings Update: The More Things Change, The More They Stay The Same

November 28, 2011 at 12:24 PM
Despite all the macroeconomic upheaval that has occurred since our last Earnings Update, the industry results shown in the FDIC's 3Q11 Quarterly Banking Profile remain remarkably similar.  Earnings may have increased, year-over-year, but this was driven largely by a decrease in loan loss provisions. Loan growth remained anemic – in fact, the 1.5% asset growth that the industry did experience between 3Q10 and 3Q11 was due to growth in securities portfolios and trading accounts.  Loans represented just under 52% of total assets in 3Q11, compared to just under 60% two years ago in 3Q07. And without certain one-time accounting gains, operating revenue would have declined by 1.0% compared to the year-ago period.
Even within this unchanging story, there remain things that banks can be thankful for this year (to reference the upcoming holiday). Declining provisions may not be the most sustainable earnings driver, but this trend does mean that asset quality is continuing to improve. The little loan growth that did occur was driven by C&I lending, which experienced the largest year-over-year growth of any loan category at 3.6%. And profitability is recovering: 3Q11 ROAE, while still lower than 2007 levels, was higher than the 7.65% reported in 2Q11.  

Banks remain incredibly liquid, with loans at just over 71% of deposits. With continuing clouds rolling in from Capitol Hill and Europe, the flight of deposits away from the stormy stock market is unlikely to slow down before year-end. We believe that core deposit funding – and low costs of funds – will be a key determinant of sustained profitability. As 2012 planning season continues, banks should focus on developing strategies to keep these deposits once the investment climate stabilizes. Banks should also look at opportunities for process improvements to support more efficient handling of deposit volumes now and for the development of ancillary capabilities in areas such as cash management.



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