BUSINESS
08/23/2011 02:00 pm ET Updated Oct 24, 2011

U.S. bank earnings up, FDIC questions for how long

By Dave Clarke

WASHINGTON (Reuters) - U.S. bank earnings continue to increase but the prospects for earnings growth are dimming as banks are having trouble boosting revenue.

The Federal Deposit Insurance Corp said on Tuesday that the industry earned $28.8 billion in the second quarter, a $7.9 billion increase from a year before.

That number is down slightly from the $28.9 billion in earnings recorded during the first quarter.

The agency again warned that earnings increases are mostly due to banks setting aside less to guard against losses from bad loans.

"As the levels of loss provisions approach their historic norms, the prospects of earnings improvement from further reductions in provisions diminish," FDIC Acting Chairman Martin Gruenberg said at a news conference on the release of the agency's quarterly banking report.

The industry set aside $19 billion during the second quarter to guard against losses, which is 53 percent less than a year ago, according to the FDIC.

Bank revenues continue to fall.

During the second quarter net operating revenues fell $3 billion, or 1.8 percent, from the levels recorded a year ago, the agency said.

In a positive sign for the industry, bank loan balances grew during the second quarter for the first time in three years, up $64.4 billion, or 0.9 percent.

Gruenberg highlighted the increase but added a note of caution.

"A significant portion of the overall growth in loans represented intra-company lending between related banks," he said. "Lending activity still has a long way to go before it approaches more normal levels."

The report covers the 7,513 banks for which the FDIC provides deposit insurance.

An official with the American Bankers Association said the quarterly report shows the banking industry is strong and that robust loan growth will come when the overall economy improves.

"Loan demand is still extraordinarily weak and the uncertainty that has been created by the last several months has frozen business decisions," said Jim Chessen, chief economist at the ABA.

The KBW Bank Index <.BKX> of stocks is down about 33 percent this year as investors fear a sputtering U.S. economic recovery and contagion from the European debt crisis.

Shares in Bank of America, the biggest U.S. bank by assets, have lost more than 50 percent of their value this year. Its shares were down as much as 6.4 percent on Tuesday due to concerns about possible write-offs and capital raises.

SOME BRIGHT SPOTS

There was evidence in the report of how the industry continues to recover from the doldrums of the 2007-2009 financial crisis.

The number of banks on the agency's "problem list" fell for the first time in 19 quarters, dropping to 865 in the second quarter from 888 in the first quarter. There have been 68 bank failures so far this year, mainly small institutions.

The deposit insurance fund that the FDIC uses to cover the cost of failed banks moved into positive territory for the first time in two years.

At the end of the second quarter, the fund stood at positive $3.9 billion, improving on a negative $1 billion at the end of the first quarter.

The amount of deposits being held at banks grew, according to the FDIC report, as skittish investors seek a safe place to park their funds.

The FDIC said that deposits grew by $234.4 billion, or 2.9 percent, during the second quarter. That number is likely to stay elevated during the third quarter given the market volatility in recent months.

"Money would not be flowing there if the public did not believe the industry was strong and the FDIC is strong," Chessen said.

(Reporting by Dave Clarke; Editing by Dave Zimmerman and Tim Dobbyn)