Is it good, bad, and should you buy it?

Now, one year after the 2023 banking crisis, which was the worst since the global financial crisis of 2008-2009, the banking industry continues to show signs of recovery, albeit slowly.

The Federal Deposit Insurance Corporation’s (FDIC) quarterly bank profile, released Thursday, highlights some of the progress made so far but also details some of the ongoing challenges.

Let’s take a closer look at the good and bad news for banks in the first quarter.

better thing

The headline numbers are truly impressive, with total net income for the 4,568 FDIC-insured commercial banks in the first quarter totaling $64.2 billion, up 79.5% from the previous quarter.

However, some perspective is needed as the fourth quarter was the worst quarter since 2020, with net income of only $38.2 billion. One reason the numbers were so low was because of the one-time special assessments the big banks had to pay to keep the FDIC’s Deposit Insurance Fund (DIF) afloat, which was depleted by last spring’s banking crisis.

Year-over-year, total net income in the first quarter of 2024 decreased by 21% compared to $81.7 billion in the first quarter of 2023. It is lower than the $71.9 billion and $71.8 billion recorded in the second and third quarters of 2023, respectively.

Additionally, overall net income for the 4,128 FDIC-insured community banks increased 6.1% compared to the fourth quarter, reaching $6.3 billion. However, their net income was still down 10% year-over-year.

Whether this is a good thing or not is open to interpretation, but there have been other positive developments as well. One of them was lending activity.

Total loan and lease balances decreased 0.3% quarter-over-quarter but increased year-over-year, with credit card loans down 3.2% and auto loans down 1.4%. Compared to the first quarter of 2023, loan and rental balances increased by 1.7%, led by a 10% increase in credit card loans, a 2.4% increase in household housing loans, and a 2.4% increase in non-agricultural and non-residential loans. Commercial Real Estate Loans.

What’s even more exciting is that deposits appear to be picking up again, increasing for two consecutive quarters. Total deposits increased by $190.7 billion, or 1.1%, from the fourth quarter of 2023.

This follows an increase of $187 billion in the fourth quarter compared to the third quarter. By comparison, the industry suffered a $421 billion decline in deposits in the first quarter of 2023, triggering a banking crisis.

Finally, the FDIC’s Deposit Insurance Fund (DIF) increased $3.5 billion to $125.3 billion, primarily due to special assessments paid by banks in the quarter. The reserve ratio improved from 1.15% to 1.17%, moving toward the goal of 1.35% in 2028.

bad

On the other hand, high interest rates have led to higher deposit rates, but they are still a drag on bank profits.

A key indicator of a bank’s profitability is its net interest margin (NIM), which is the difference between the interest it receives on loans and the interest it pays on deposits. Overall NIM in the first quarter was 3.17%, down 10 basis points from the fourth quarter, and community bank NIM was down 12 basis points to 3.23%.

NIM also remains 41 basis points below its pre-pandemic average. These figures suggest that high deposit costs are still a major factor and may not stop until interest rates start to fall.

Another negative aspect of this report is the overall decline in credit quality. The proportion of all loans that were overdue by more than 90 days before maturity was 0.91%, which was 5bp higher than the previous quarter and 16bp higher than the same period last year.

However, this rate is far below the pre-pandemic average of 1.28%.

This increase is primarily due to an increase in delinquent commercial and industrial loans and non-owned commercial real estate (CRE) loans. In the latter case, the delinquency rate is 1.59%, the highest since the fourth quarter of 2013.

Finally, the net charge-off rate, which is the percentage of non-performing loans that the bank expects will not be repaid, was 0.65%. This is unchanged from the previous quarter, but 24 basis points higher than the first quarter of 2023 and 17 points higher than the pre-pandemic average.

The main concern is credit cards, and the credit card net charge-off rate was 4.7%, the highest since the third quarter of 2011 and up 55 basis points from the fourth quarter.

As credit quality deteriorates, banks typically need to make more provisions for credit losses, which affects their earnings.

Should you buy bank stocks?

So far in 2024, large bank stocks are up 5.8%, while regional bank stocks are down 13.3%, according to the KBW Nasdaq Bank Index. Therefore, investors interested in bank stocks should look more at large banks because the risks of regional and small banks are much higher.

Although the situation is slowly improving, the economic environment of high interest rates and a potential economic slowdown continues to pose challenges for banks. That’s not to say there aren’t some really good deals right now. Because there is. However, investors should do their due diligence on individual bank stocks before purchasing.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.