November 26, 2013 4:20 pm

JPMorgan woes cause first fall in US bank income in four years

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©Reuters

JPMorgan’s mounting legal bills have contributed to the first fall in US banks’ net income for more than four years, according to a report released by the Federal Deposit Insurance Corporation on Tuesday.

FDIC-insured banks reported total net income of $36bn in the third quarter – $1.5bn less than a year ago, and the first year-on-year decline since the second quarter of 2009.

Half of the 6,891 institutions insured by the FDIC reported growth in earnings during the past year. But the FDIC said JPMorgan’s litigation expenses were the big reason for the 4 per cent overall drop and, without these costs, the upward trend in bank earnings would have continued.

Legal costs are expected to have less impact on future net income, as JPMorgan and other US banks settle various cases. In October, JPMorgan reported its first loss since 2004 following a $7.2bn litigation hit from investigations into mis-selling mortgage-backed securities, and other regulatory deals. This month the bank agreed to pay $13bn in a mortgage securities settlement with the US Department of Justice.

However, falling revenues from mortgages remain a longer-term problem for banks. Rising interest rates have reduced mortgage refinancings, lending and related activity. Income from the sale, securitisation and servicing of family mortgage loans had fallen by $4bn – a 45.2 per cent drop from the same period a year ago – the FDIC said.

“Higher interest rates will be the ongoing issue for the industry,” said Martin Gruenberg, FDIC chairman. He added that the agency’s examiners were closely watching how banks handled the change in the interest rate environment.

But the federal agency also identified improvements in loan performance at the banks it insures.

Expenses from bad loans fell almost 50 per cent to $11.7bn as mortgages from the housing bubble gradually moved off banks’ books. Only six institutions failed in the third quarter, bringing the total to 22 for the year to date, compared with 43 last year.

Most of the positive trends we have been seeing in industry performance continued in the third quarter

- Martin Gruenberg, FDIC

Loan balances increased by almost 1 per cent to $69.7bn, with all the main loan categories, apart from family home mortgages, showing growth in the third quarter. Banks also made lower loan loss provisions, setting aside $5.8bn in the third quarter – a 60.4 per cent fall year on year, and the smallest loss provision since the third quarter of 1999.

In addition, the industry’s coverage ratio, which measures reserves to non-current loans, improved for the fourth quarter in a row from 62.3 per cent to 64.5 per cent.

“Most of the positive trends we have been seeing in industry performance continued in the third quarter,” Mr Gruenberg said. “Fewer institutions reported quarterly losses, lending grew at a moderate pace, credit quality continued to improve, more banks came off the ‘problem list’ and fewer banks failed.”

Nevertheless, the overall fall in net income comes after a report by consultants McKinsey highlighted a tougher environment for US banks. McKinsey’s research, published last week, found that the average profitability of the top investment banks, in terms of return on equity, was just 8 per cent last year – which dragged the global average down to 10 per cent.

McKinsey said the situation would worsen in the coming years, resulting in an average return on equity of just 4 per cent for the big banks, if they continued on the same course.

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