5 Charts Show Bank Recovery

Don't let the mundane nature of government press releases fool you, because many of them offer vital and extremely actionable information for investors.

A perfect example is the FDIC's Quarterly Banking Profile, an industry-wide report revealing the latest trends in the banking sector.

What follows are the five most important charts from the accompanying presentation released today.

1. Earnings at six-year high and growing
This chart shows that third-quarter earnings in the industry came in at $37.6 billion. This represents a six-year high and is the 13th consecutive quarterly year-over-year increase.

Source: FDIC's Quarterly Banking Profile.

For those of you who follow banks, this likely isn't a huge surprise. In the middle of last month, for instance, both JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) , the nation's first and fourth largest banks by assets, respectively, reported record quarterly earnings. Wells Fargo alone originated a staggering $139 billion in home loans over the three-month time period.

Click here to read about JPMorgan's third-quarter earnings, and here for Wells Fargo's.

2. Net operating revenue fueled earnings gain
In the past few quarters, as my colleague Russ Krull discussed at the beginning of September, the improvement in industrywide earnings was driven largely by decreases in loan loss provisions as opposed to organic revenue growth. This notably changed last quarter, as net operating revenue -- that is, the sum of net interest income and noninterest income -- increased by 3% on a year-over-year basis. Needless to say, this represents an enormous inflection point for the industry and lends further credibility to claims that lenders like Bank of America (NYSE: BAC  ) may have finally turned the corner.

Source: FDIC's Quarterly Banking Profile.

3. Credit quality is improving
One of the biggest problems coming out of the financial crisis concerned the billions of dollars worth of toxic loans on bank balance sheets. As I've noted before, for instance, over the last four calendar years, Bank of America has charged off a staggering $105 billion in bad loans, the majority of which were made to subprime borrowers.

Fortunately, as you can see below, this trend is well on the road to recovery. According to the FDIC, while industrywide loan loss provisions totaled a still-significant $14.8 billion last quarter, this was nevertheless 20.6% less than the $18.6 billion that insured institutions set aside for losses in the same quarter last year.

Source: FDIC's Quarterly Banking Profile.

4. More banks are growing, and fewer are recording losses
At the height of the financial crisis in 2008, the banking industry was evenly split between banks that were growing on a year-over-year basis and those that were recording quarterly losses. In the meantime, the gulf has continued to widen as both the number of banks growing their bottom lines has increased and the number recording losses has decreased.

Source: FDIC's Quarterly Banking Profile.

5. Fewer banks are failing
In a similar vein to the previous figure, the number of quarterly bank failures has dropped to the lowest level since the fourth quarter of 2008 -- that was the first quarter after the collapse of Fannie Mae and Freddie Mac, Lehman Brothers, and Washington Mutual, among others. In the three months of July, August, and September, a comparatively modest 12 banks were seized by regulators compared to 50 at the height of the crisis.

In addition, the FDIC continued to reduce the number of so-called "problem" banks, removing 38 institutions from its unofficial watch list. This marked the sixth consecutive quarter in which the number of problem banks has decreased, and it's the first time in three years that the list has included fewer than 700 institutions.

Source: FDIC's Quarterly Banking Profile.

The Foolish bottom line
Make no mistake about it, the banking sector is improving. But to see whether it's time to get in on this trend, check out this recently released in-depth report on Bank of America. In it, our senior banking analysts Anand Chokkavelu explains why he believes shares in the megabank could "double or triple over the next five years." To access a copy instantly, simply click here now.


Read/Post Comments (5) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 06, 2012, at 6:15 PM, DrWD wrote:

    Hey guys, do you check before you publish? Graph #3 is correct, but graph #5 changes format at 2011 q2, it should be the same format at graph number 3 to be correct. DO YOU CHECK THESE FIRST?????

  • Report this Comment On December 07, 2012, at 1:14 AM, dsciola wrote:

    Enjoyed your piece on the banking industry, especially since I've been wanting to learn more about valuing banks.

    I dont understand your analysis / rationale in charts 2 and 3.

    For 2, How does a 3% increase in revenue represent an 'inflection point' or anything really promising? I would think that in most industries, a 3% increase in revenue would be unimpressive.

    For 3, what exactly is this chart showing? What imrovement is being demo'd by this chart? Is it simply saying that banks are 'setting aside' less loans as delinquent? I would think that it'd be better to know how many loans the banks hold that have been delinquent for a certain period and also how many loans on banks' balance sheets are still subprime compared to all their loans.

    Would love to hear your thoughts and also if u can anymore resources for learning how to value banks.

    Dom

  • Report this Comment On December 07, 2012, at 11:52 AM, JohnMaxfield37 wrote:

    DrWD,

    The graphs come directly from the FDIC's Quarterly Banking Profile.

    John

  • Report this Comment On December 07, 2012, at 12:09 PM, JohnMaxfield37 wrote:

    Dsciola,

    Good questions.

    First, with respect to chart 2, profitability at banks has been on the rise over the last couple years (see chart 1). However, until this last quarter, the actual increase was merely on paper because it derived from a decrease in loan loss provisions (these are accounted for as an expense on the income statement even though they're just moving funds from one account on the balance sheet to another). Last quarter, then, was the first such time period in which net operating income (which is the sum of net interest income and noninterest income) was the primary catalyst for earnings growth. And that's what chart two, read in conjunction with chart 1, tell us.

    With respect to your second question, chart 3 shows us two things. First, as highlighted by the red, quarterly net charge-offs continue to decrease -- these are the amount of bad loans that a bank actually charges off each quarter after subtracting out what the recover via foreclosure sales, etc. To tie chart 2 into this, every quarter a bank sets aside funds to cover bad loans in the future (these are the provisions for loan losses just discussed). These funds go into a bank's "allowance for loan losses." Then, when the bank subsequently charges them off, the amount is then deducted from the allowance for loan loss.

    The second thing that chart 3 shows via the blue highlight is that noncurrent loans are decreasing in aggregate for the industry -- though the actual result was apparently nominal last quarter.

    Finally, how to learn about valuing banks... I'm sure there's a great resource out there, I just don't know of it. I'd browse around on Amazon.

    That being said, here's what I'd recommend, read 10-Ks and 10-Qs (you can access these on the SEC's EDGAR database for whatever bank you're interested in). And in this regard, I'd focus on the following four levers: (1) capital/leverage (both quality and trends), (2) credit quality (how good are their loans?), (3) efficiency ratio (this tells you how much they spend vs. how much they bring in in revenues), and (4) net interest income. If you acquire a good understanding of these four things, you'll be in great shape!

    Hope that helped!

    John

  • Report this Comment On December 07, 2012, at 5:03 PM, dsciola wrote:

    Thx for the feedback.

    Per chart 2, so then basically this was the first quarter in over 3 yrs where any 'real' revenue growth took place as opposed to accounting / pseudo-cost cutting growth, if u will. That's how I interpret your explanation at least, and 3% still sounds like a small figure here...

    Per 3, get what you mean there, are non-current loans another term for delinquent loans or somethin else.

    Thanks for the valuation tips as well. Sometimes its hard to really figure out the value behind these behomoth banks since their financials can come across as one elaborate black box.

    Dom

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