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May 30, 2013

The Real Story Behind Banks' $40B Record Earnings

On the surface, a regulatory report noting banks’ first quarterly profit of $40 billion shows an industry that seems fully recovered from the financial crisis and primed for future growth.

But a closer examination of the Federal Deposit Insurance Corp.’s industry update released Wednesday tells a different, and more dispiriting, story — institutions that are still having trouble making profits from loans. Indeed, much of the record profit appeared due not to a suddenly resurgent industry, but a couple of idiosyncratic balance-sheet items at top-tier banks.

The rest of the report showed a trend that has been constant over the past several quarters, with banks facing flat interest-related revenue and making money mostly from reductions in loan loss provisions, an income booster that will soon run dry.

“We have seen over the last three years a process of improving credit quality for the industry as a whole, and that’s allowed for a … reduction in [loss] reserves and that’s helped drive the net income improvements that we’ve seen. Our sense is that process has largely played itself out,” FDIC Chairman Martin Gruenberg said at the release of the Quarterly Banking Profile.”

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Read full American Banker article here (subscription required)

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