News:Net income for banks down in 2008

The Federal Deposit Insurance Corporation (FDIC) reports that commercial banks and savings institutions had a net income of $19.3 billion in the first quarter of 2008, a decline of $16.3 billion from the $35.6 billion the industry earned in the fourth quarter of 2007. Higher provisions for loan losses has been the primary cause for the drop in industry profits. Fifty percent of all insured institutions reported a lower net income in the first quarter of 08.

"To sum up, while we may be past the worst of the turmoil in financial markets, we're still in the early stages of the traditional credit stress you typically see during an economic downturn," says FDIC Chairwoman Sheila C. Bair.

The FDIC also said restatements of fourth-quarter 2007 profits by some institutions "reduced industry earnings for that quarter from the $5.8 billion previously reported to $646 million." That is the lowest reported quarterly net income since 1990.

Some of the biggest problems remain in noncurrent loans, high provisions for loan losses, and the industry's "coverage" ratio continues to deteriorate. The FDIC reports noncurrent loans have increased by $26 billion during the first quarter, following a $27 billion increase in the fourth quarter of 2007. Nearly 90 percent of the increase during the first quarter came from real estate loans, though noncurrent loans grew in all major loan categories.

As a result of the rise of problem loans, institutions have increased their provisions for loan losses. In the first quarter, loss preventions totaled $37.1 billion, over four times the amount set aside for first quarter 2007.

"Given the weaker economy and rising level of problem loans, we're encouraging bank managers to stay on their toes. We're urging all institutions to make sure their reserves are large enough to cover expected losses. We also want them to beef up their capital cushions beyond regulatory minimums given uncertainties about the housing markers and the economy," says Bair.

The increase of noncurrent loans means that the coverage ratio (loss reserves as a percentage of noncurrent loans) dropped from 93 cents for every $1 of noncurrent loans to 89 cents. The lower the coverage ratio, the higher the debt.

"This is a worrisome trend. It's the kind of thing that gives regulators heartburn," says Bair. "The banks and thrifts we're keeping an eye on most are those with high levels of exposure to subprime and nontraditional mortgages, with concentrations of construction loans in overbuilt markets, and institutions that get a large share of their revenues from market-related activities, such as from securities trading."