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Bank earnings are booming, but there’s a big problem

Mortgages exiting the industry

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corp. posted the 17th quarterly increase since 2009 due to an $8.1 billion decline in loan-loss provisions in the fourth quarter of 2013.

In short, loans are performing better, so banks are setting aside less cash to cover those damages. However, the current state of the mortgage market is becoming a big problem. Just today, mortgage applications hit a two-decade low.

The extra cushion boosted the institutions’ net income to $40.3 billion in the fourth quarter of 2013, a $5.8 billion, 16.9%, increase from the $34.4 billion in earnings reported a year earlier. 

Due to less income from reduced mortgage activity and a drop in trading revenue, there was a year-over-year decline in net operating revenue — the sum of net interest income and total noninterest income.

Mortgage activity is still coming in short compared to the past, with one- to four-family residential real estate loans originated and intended for sale reaching $307.7 billion, 62% lower than in the fourth quarter of 2012, as rising interest rates in the first half of 2013 reduced the demand for mortgage refinancings.

Noninterest income from the sale, securitization and servicing of mortgages hit $2.8 billion, 34% lower than a year ago.

In addition, more than half of the 6,812 insured institutions reporting had year-over-year growth in quarterly earnings, while the proportion of banks that were unprofitable fell to 12.2%, from 15% in the fourth quarter of 2012.

"The trend of slow but steady improvement that has been underway in the banking industry since 2009 continued to gain ground," said FDIC Chairman Martin Gruenberg. "Asset quality improved, loan balances were up, and there were fewer troubled institutions.”

But the industry still has some hurdles to jump.

“Narrow margins, modest loan growth, and a decline in mortgage refinancing activity have made it difficult for banks to increase revenue and profitability,” he continued. “Nonetheless, these results show a continuation of the recovery in the banking industry."

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