Wednesday, August 24, 2011

Modest green shoots...

...very modest and full of caveats, but the issue remains: Loan demand must recover and help re-capitalize the same banks that suffered such mind bending losses.

WASHINGTON — On the surface, the industry turned a corner last quarter. Loans actually grew, the Federal Deposit Insurance Corp. returned to black and the official watch list for failure-prone banks shrank for the first time in five years.

But a closer look at the FDIC's Quarterly Banking Profile reveals a familiar theme: banks are still tiptoeing to recovery. Loans rose for the first time since 2008, but lower loss provisions yet again drove earnings, and lower revenue was a sign that institutions remain risk-averse as the economy continues to struggle.

"We are mindful that earnings growth cannot be sustained indefinitely only by reducing loss provisions," Martin Gruenberg, the FDIC's acting chairman, said at the release of the second-quarter report.

Overall, banks and thrifts reported earnings of $28.8 billion for the quarter, down 0.3% from the first quarter but up by nearly 38% from a year earlier. It was the eighth straight quarter with year-over-year earnings growth.

Once again, profits were attributable mostly to the fact banks stored away fewer reserves for loan losses. Loss provisions have dropped for six straight quarters. Compared with the second quarter of 2010, provisions fell 53%, to $19 billion, the seventh consecutive such decline.

Nearly 60% of all institutions had better quarterly earnings than a year earlier, and the 15% of unprofitable institutions was the lowest level since the first quarter of 2008.

After three whole years of declining loan balances, the industry finally reversed the trend in the second quarter, increasing loans by 0.9% during the quarter, to $7.3 trillion. (Loans had technically risen in early 2010, but that was a result of new accounting rules.)

But further detail shows the growth was modest. While commercial and industrial loans increased for the fourth straight quarter, by 2.8%, to $1.24 trillion, other indicators were less encouraging.

Real estate construction loans fell for the 13th straight quarter, by 7%, to $275 billion. Also declining were one-to-four-family mortgages, by 0.3%, to $1.83 trillion.

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