Banks return to an industry Americans can bank on

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Vilified as a chief cause of the global financial crisis three years ago, America’s banks appear to be quietly on the mend.

The Federal Deposit Insurance Corp.’s “Problem List” of troubled banks has shrunk to fewer than 700 for the first time in three years, and the industry is poised to see about half the number of bank failures of 2011 and one-third the number that collapsed in 2010 in the wake of the Great Recession.

The financial markets are picking up on these positive signs from the banking community. Across the industry, profits are at six-year highs among banks that are insured by the FDIC, although bankers say the rebound isn’t fully appreciated in Washington.

“I bristle when I hear these polarizing extremes: ‘The banks are all bad, let’s hang them from the highest rafters,’” said David Stevens, president and CEO of the Mortgage Bankers Association, contending that the lenders who caused the most damage have been forced out of the market.

Dick Bove, a bank analyst with Rafferty Capital Markets, said the banks that have survived the tough times have emerged stronger as the economy starts to recover.

“Everyone has done nothing but beat on the banks for the havoc they caused,” he said. “It’s not very well understood that banks in the United States are extraordinarily profitable right now and have been growing for the last few years.”

In the third quarter of 2012, U.S. banks made $37.6 billion in profits, according to the FDIC, a 6.6 percent increase from the same period the previous year. Mr. Bove said he expects record profits in 2013.

More important, fewer banks are closing. In 2012, 51 banks have failed, down from 93 last year, and a fraction of the 297 banks that were shut down in 2010 and 2011. The 2012 failure total is on pace to be the lowest since 2008.

The number of banks on the Problem List fell for the sixth consecutive quarter to 694 institutions, the FDIC announced this month.

“The declining number of failures is reflective of an improving trend in the banking system over the last few years,” said Chris Newbury, associate director of the insurance and research division at the FDIC. “We have a generally profitable industry. They improved significantly in the period immediately after the financial crisis.”

Mr. Stevens noted that the financial services industry made mistakes, which resulted in weeding out shaky banks.

“Everybody acknowledges that, and many of those institutions are out of business today,” Mr. Stevens said. “They’ve been absorbed by other companies. Wells Fargo has Wachovia on its balance sheet. Bank of America has Countrywide on its balance sheet. JPMorgan has Washington Mutual on its balance sheet.”

The market notices

Wall Street has responded positively. The Standard & Poor’s 500 financials index, which tracks banks and other financial institutions, has posted a nearly 35 percent spike since last December – compared with a 20 percent increase for the entire S&P 500 over the same period. The Dow Jones U.S. financials index has jumped nearly 32 percent during that time, while the overall Dow Jones industrial average is up about 13 percent.

Some banks have performed particularly well. Bank of America Corp. stock has more than doubled, while JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Capital One Financial Corp. are up an average of about 40 percent.

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