When FDIC Chairman Martin Gruenberg issued the release of the fourth quarter 2023 quarterly banking profile (3/7/2024), he had many good things to say about the state of our economy. He also added some cautionary statements about what "could go wrong".
We prefer to keep our eyes on what is. The U.S. consumer is resilient, as is the banking industry. That's how it is, at least so far.
This week's issue of Jumbo Rate News is full of graphs that prove it.
As long as consumers are confident enough to keep spending, AND have the means to pay back what they owe, the economy will remain resilient.
The Consumer Drives the Economy
FDIC Chairman Martin Gruenberg could have been speaking about any number of things (or people) when he spoke about resilience after a period of stress Thursday morning (3/7/24). He was, however, referring to the banking industry’s recovery after the big failures early last year. He continued to tout that income was high, “overall” asset quality is “favorable” and liquidity is “stable”.
He chose his words carefully, as if to calm the crowd of listeners.
Then, he went into all of the things that could go wrong in the coming months, including: geopolitical uncertainty; inflationary pressures; volatility in market interest rates; and for some banks at least, commercial real estate portfolios.
It sounds like we are in the calm before the storm. Are we? Let’s break down 2023 in a historic context. (You will find accompanying graphs on page 5.)
We lost 119 banks in calendar 2023 (2.5% of the industry). That’s slightly less than the 3% average we’ve witnessed over the last ten years. Assets at those banks grew at a very slow rate (just 0.3%) over the year. Over 90% of total assets are earning assets (i.e. loans or investments).
Total loans grew 1.8% over the year. Consumers led the way with a 10.6% increase in credit card balances. In addition to loan growth, cash balances held at banks increased; 5.3% in the fourth quarter alone.
Securities portfolios, on the other hand, while up in the fourth quarter, were down 7.6% over the year. The fourth quarter increase was attributed largely to improvements in the fair value of the securities.
A special assessment and other non-recurring expenses charged to large banks, combined with higher loan loss provisions overall, served to dampen 2023 income. While net income remains well above pre-pandemic level, 10.9% of the industry reported a fourth quarter loss in 2023.
Admittedly, fewer than half that were unprofitable for the full year, but this is the largest percentage of unprofitable banks we have seen since the fourth quarter of 2017, when 16.6% of banks posted a loss.
Speaking of losing: Bank deposits bulked up during the pandemic, growing nearly 40% between the end of 2019 and the end of 2021, eventually reaching a peak in excess of $18 trillion. Some of those deposits (about 5%) have found their way back out of the safety of FDIC insurance, but the majority remain. Domestic deposits declined by just over 2% during 2023.
The net interest margin of 3.31% at 9/30/23 and 3.30% at 12/31/2023 gave U.S. banks a welcome respite from rising deposit costs. The full-year net interest margin grew 35 basis points over 2022; 76 basis points over 2021; and is now above the pre-pandemic average of 3.25%.
There are a number of different capital ratios that we look at here at Bauer, but we only had space for one on page 5. Bank equity capital increased 4.1% over the course of 2023, ending the year at $2,294.66 billion. When divided by total assets, that gives us an equity to assets ratio of 9.69%, which is up from 9.34% a year ago. That 35 basis point increase is represented on the page 5 graph.
As for other capital to asset measures: the leverage capital ratio increased 16 basis points, ending 2023 at 9.14%; and the Tier 1 risk-based capital ratio increased from 13.65% to 13.92%. The total risk-based capital ratio, 14.94% at 12/31/2022 was up 31 basis points to 15.25% at 12/31/2023. And finally, the common equity (of CET1) capital ratio went from 13.56% to 13.86% during the year.
While all capital ratios were improving over the course of 2023, loans were stressing. Noncurrent loans (those 90 days or more past due plus nonaccrual) increased by 19.2% year-over-year, while loans 30-89 days past due were up 11.8%. To make matters worse, net charge-offs increased nearly 90% and are now well above their pre-pandemic average.
Big banks (assets of $10 billion or greater) had, by far, the highest net charge-offs as a percent of loans at 0.59%. Banks with assets between $1 billion and $10 billion reported net charge-offs of less than half that (0.25%) and the smaller banks were all under 0.10%.
Charge-off rates vary greatly by location as well. Banks in the San Francisco region average 0.97% in net charge-offs to loans while the Dallas region averages just 0.19%. The biggest factor determining the loan quality, however, is the type of loan.
The nationwide average net charge-offs to loans is 0.52%. Not bad. Many types of loan charge-offs are well under that. Real estate loans, for example, had a net charge-off rate of just 0.07% at year-end 2023. It was loans to consumers that skewed the chart. All loans to individuals had a charge-off rate of 2.29% in 2023. Credit cards by themselves had a rate of 3.56%. No other loan category came close.
Loans 90 days or more noncurrent show signs of stress in real estate (especially home equity) loans, as consumers lead the charge… offs. Looking at the short-term past dues (30-89 days) we again see consumers as the primary cause for the rise in problem loans. Here’s the conundrum. We need consumers to be confident enough to keep spending, but not over-confident. They have to have the means to pay back what they owe. Consumers are the drivers of this economy.
