US Banks See Profit Increase Amid Economic Uncertainty The US banking industry reported a rise in second quarter profits, climbing to $71.5 billion—an 11.4% increase from the first quarter. This boost is attributed primarily to one-time securities gains and the absence of fees needed to repay the Federal Deposit Insurance Fund. Notably, large banks like JPMorgan Chase, PNC, and Northern Trust capitalized on long-held share gains from Visa's IPO, contributing nearly $10 billion in profits. ## Credit Quality Worsens Despite Profit Gains Despite the profit rise, the banking sector's credit quality has shown signs of deterioration. The rate of writing off bad loans, or net charge-offs, increased by 3 basis points to 0.68%. This rate, the highest in over a decade, is driven by increasing defaults in credit card and non-owner-occupied commercial real estate loans. These loans, at risk of going bad as they are 90 days past due, have raised concerns despite remaining below pre-pandemic levels. ## Impact of Federal Reserve's Interest Rate Policies With the Federal Reserve set to lower interest rates, the banking industry faces the end of a two-year period marked by tighter monetary policies. While high-interest rates have bolstered profits for major banks, they have also squeezed margins sector-wide. The net interest margin—which evaluates the difference between earned interest and paid interest—declined in the second quarter, standing below historical pre-pandemic averages. This decline mainly affects banks with assets exceeding $250 billion. ## Challenges and Opportunities Amid Rate Cuts The industry is also contending with substantial paper losses from lower-yielding bonds, totaling $513 billion in the second quarter. These losses slightly decreased from the previous quarter. Banks like PNC and Truist have recognized billions in losses on underwater bonds, aiming to improve margins as anticipated rate cuts approach. Lower interest rates might alleviate some of the profitability challenges from these investments, provided borrowers meet interest payment obligations. FDIC acting Chair Martin Gruenberg emphasized the need to monitor weaknesses in specific loan portfolios, including office properties, credit cards, and multifamily loans. While potential rate cuts could benefit banks' balance sheets, economic uncertainties and market conditions remain significant risks.
