FDIC earnings report shows banks not out of the woods yet

Commerical and savings banks in the US show a net loss of $3.7 billion in the second quarter of 2009

WASHINGTON DC - The second quarter earnings report from the Federal Deposit Insurance Corporation shows significant challenges remain for US commercial and savings banks. The figures show that banks and savings institutions insured by the FDIC reported an aggregate net loss of $3.7 billion in the second quarter of 2009, a decline of $8.5 billion from the $4.8 billion in profits the industry reported in the second quarter of 2008. Insured institutions earned $424 million in net operating income during this latest quarter, even after a special assessment of $5.5 billion to bolster the FDIC's insurance fund. However, one-time losses and other items totalling $4.1 billion pulled the industry results into negative territory.

Despite this, FDIC chairman Sheila Bair remains confident of the banks' ability to recover. "While challenges remain, evidence is building that the US economy is starting to grow again," said Bair. "Banking industry performance is - as always - a lagging indicator. The banking industry, too, can look forward to better times ahead. But, for now, the difficult and necessary process of recognising loan losses and cleaning up balance sheets continues to be reflected in the industry's bottom line."

She added: "The FDIC was created specifically for times such as these. No matter how challenging the environment, the FDIC has ample resources to continue protecting depositors as we have for the last 75 years. No insured depositor has ever lost a penny of insured deposits...and no one ever will."

The American Bankers Association also remain bullish for the future of US banks. In a statement it said: "Today's report makes clear that banks are neither at the beginning or the end of the problems presented by a difficult economy. They are in the middle, and significant challenges still remain. However, the vast majority of banks have been in existence for decades, and we have every confidence that the long-term future is positive, and that the industry will emerge from this deep recession with significant resources to continue serving local communities for many more decades to come."

Provisions for loan losses by the FDIC totalled $66.9 billion in the quarter, an increase of $16.5 billion (32.8%) over the second quarter of 2008. Extraordinary losses stemming from writedowns of asset-backed commercial paper totalled $3.6 billion, compared with extraordinary losses of $366 million a year earlier. Indicators of asset quality also continued to worsen during the second quarter.

"Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses," said Bair. "Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared with a year ago."