Lending, net income soar to new heights, so why not profitability?
The American Bankers Association released a statement on the FDIC’s second quarter bank earnings report last week, and results were very promising for the health of the economy. Bank lending hit a new milestone of $8 trillion, and net income soared to near-record highs; however, profitability continues to lag for the banking industry.
Hitting the $8 trillion mark in lending is a significant feat – it denotes increasing confidence both on the consumer and lender sides of the spectrum. Low interest rates and a highly competitive banking environment leaves businesses in a favorable position. Those actively seeking funding can do so at a relatively low cost, and will benefit as banks vie for their business.
As a result, we’ve seen total lending up $377 billion year-over-year. With more access to funding, businesses are able to expand operations and hire new personnel. This trend has manifested in the form of 210,000 jobs being created each month. What’s more, banks have seen a decrease of over 55% in non-performing loans since their peak in Q1 of 2010. This means that not only are bank portfolio sizes increasing, but the quality is as well.
With such promising statistics and growth across the board, why then, is profitability not mirroring the upward trends of other key ratios? At the forefront of this dampened profitability is the surge in compliance-related costs banks are being forced to absorb as policy makers continue to release new regulations for the banking industry. Among other metrics, take for instance the number of items per call report. Since 1960, this number has increased from 231 items to around 2,000 today. While this increase is largely a necessity as banking evolves and continues to grow more complex, it nonetheless means that banks must spend more time and more money ensuring that they are compliant with new and existing regulations.
An ABA infographic cites: “A $70 million bank in Kansas has dedicated 3.5 of 25 employees to compliance-related tasks. This means 15% of the bank’s employees focus just on red tape.” Though this is an extreme case, community bankers throughout the United States have seen profitability squeezed by increasing regulation. Also on the ABA infographic is a quote from Ben Bernanke, former chairman of the Federal Reserve, detailing bank challenges in the form of stiff competition and increasing regulations. He states, “…Some observers have worried that these obstacles – particularly complying with regulations – may prove insurmountable” for the “battle-scarred survivors of a financial crisis and deep recession.”
In summary, financial institutions have seen fairly prosperous economic conditions in recent quarters, and have benefited from higher quality portfolios, increasing their book of business and upping revenue as a whole. In recent times, however, less and less of this revenue has been finding its way to the bottom line as banks continue to navigate their way through an ever-growing regulatory framework.