Bank Profits Soar And Corporate Bonuses Swell As Broader Economy Stagnates
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The divide between corporate fortunes and those of ordinary Americans continues to widen, as banks post strong profits and the nation's largest companies boost executive pay.
Banks and corporations are exhibiting a confidence reminiscent of pre-crisis days, even as the broader economy still sputters. Bank profits soared in the first three months of the year, and corporate profits likewise swelled last year. And executives saw ever fatter bonuses. But the amount of cash banks sent out into the economy as loans declined last quarter, and the pace at which companies are hiring new workers remains disappointing with the unemployment rate stuck around 9 percent.
For big corporations, the recession's legacy has all but faded. But for much of the rest of America, finances are still tight. Home values are falling at an accelerating pace, and high energy prices recall the nightmarish summer of 2008. The widening divide in fortunes constitutes a long-term drag on the economy, experts say.
"If a very small number of people have everything, everybody else has nothing," said Mark Blyth, professor of international political economy at Brown University. "If they decide not to spend, or if they decide basically not to invest, then everyone else's health and well-being depends upon the decisions of a few, whose consumption decisions are utterly different and completely independent of everyone else's."
Bank revenue fell during the first three months of the year, but profits soared as institutions set aside less money to cover losses, according to new government report. Bank profits rose to reach $29 billion, a 66.5 percent increase from the same period last year and the best quarterly performance since the second quarter of 2007, the report said.
Net operating revenue at banks insured by the Federal Deposit Insurance Corporation was 3.2 percent less than the same period a year ago, marking only the second time on record that the industry has reported a year-over-year quarterly revenue decline, the Tuesday report from the FDIC said. But banks stored away 60 percent less money to cover losses than a year ago, the smallest rainy-day provisions since the third quarter of 2007, according to the report.
"The process of repairing bank balance sheets is well along, but is not yet complete," FDIC chair Sheila Bair said in a Tuesday release, adding that "there is a limit to how far reductions in loan-loss provisions can boost industry earnings."
In corporate America, pay is up. For chief executives at the Standard & Poor's 500 index companies, compensation grew last year after two years of decline, according to a report from private research firm Equilar. Median total compensation for S&P 500 chief executives swelled by 28.2 percent last year, largely driven by swelled bonuses. The median bonus for S&P 500 chiefs was nearly $2.2 million last year, a 43.3 percent increase from 2009, the report says.
A variety of factors gave large companies a boost last year, including the Federal Reserve's $600 billion asset-purchase program that began in the fall. As the Fed's purchases of Treasury securities lowered interest rates, investors searching for yield turned toward riskier assets like equities, contributing to a stock market rally in the second half of the year.
But in the broader economy, challenges remain. Companies have added hundreds of thousands of jobs so far this year, but the unemployment rate has still been hovering around 9 percent. Oil prices remain at highs reminiscent of 2008, when months of high energy prices helped drag the economy into recession. And home prices continue falling, with economists forecasting the decline to last at least through the rest of the year.
Banks decreased their lending last quarter, with many still compensating for the excesses of the years leading up to the financial crisis. And nearly half of the loans to commercial and industrial borrowers -- which increased overall -- went to foreign borrowers, the FDIC says. Small loans to farms and businesses, a crucial source of jobs, declined by 2.8 percent, according to the FDIC.
Economic weakness contributed to the erosion in bank revenue last quarter. Interest-earning assets showed weak growth, so that six of the 10 largest institutions reported year-over-year declines in net operating revenue, according to the FDIC.
Banks' other operations also proved less lucrative. Trading income was down by $1 billion last quarter, and service charges on deposit accounts declined by $1.7 billion, the FDIC says.
Losses from bad loans, though, are gradually declining as the volume of delinquent loans goes down. Loans overdue for at least 90 days declined for the fourth quarter in a row to $341.7 billion by the end of March, a 4.7 percent decline from the end of 2010, according to the FDIC.
The number of banks at risk of failure increased last quarter, as the FDIC's "problem list" grew to 888 institutions from 884. That's almost 12 percent of the banks insured by the FDIC. The pace of banks' being added to the list, though, is slowing.
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First Posted: 05/25/11 03:26 PM ET Updated: 07/25/11 06:12 AM ET