Banks return to an industry Americans can bank on
Banks are growing stronger for several reasons, analysts say. After the financial crisis, they tightened lending standards and beefed up the capital they hold to protect against failure.
“If you talk to any bank in America today, the message they’re getting from their CEOs is, ‘I don’t want to be in the headlines ever again. Don’t do any bad loans that could cause a regulatory impact and does significant damage to my balance sheet,’” Mr. Stevens said.
A few years later, the bad loans are being cleaned out of the system. According to the FDIC, loss provisions in the third quarter dropped 20 percent from the same period in the previous year to $14.8 billion.
“When the economy rolled over in 2008, credit became nearly impossible for borrowers with poor credit, so the bad loans have been flushed out and the new loans that are made to replace them are of much better quality,” Mr. McBride said.
This has allowed banks to chip away at some of the excess capital they stockpiled in the wake of the financial crisis and invest it. “What they have set aside in years past is actually now being deemed as more than was needed,” Mr. McBride said.
Mr. Bove agreed, saying banks “overreserved” to cushion against losses at the beginning of the sharp U.S. downturn.
“So at the beginning of the crisis, they drove profits below normal, and now they’re getting those profits back,” he said.
They’re using that extra money to make more loans and increase profits – although not at a pace many credit-starved lenders might like.
Not all bullish
Despite the good numbers, U.S. banks face a number of clouds on the horizon. A McKinsey & Co. survey of the global banking industry, released in October, concludes that American banks are in better shape than many of their European and Asian rivals, but they still face major questions in getting back to pre-recession levels.
In addition to boosting capital, “American banks became more stable as they successfully cleaned up balance sheets through significant write downs and the creation of ‘good bank/bad bank’ structures to sequester and remove troubled assets,” the McKinsey report says.
“However, the sector still faces significant challenges,” including sluggish revenue growth, “volatile” lending margins and increased costs.
Banks around the world have bounced back from the depths of the Great Recession, the report says, but haven’t settled on a “sustainable model” to guarantee adequate profitability in the years ahead.
Still, the size of American banks’ loan portfolios increased for the fifth time in the past six quarters by $64.8 billion, or nearly 1 percent, and loan sales rose by $3.9 billion, according to the FDIC.
“It’s still modest growth, but after many quarters of contraction in loans, it’s a positive sign,” Mr. Newbury said.
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