The Federal Deposit Insurance Corp. (FDIC) recently issued its quarterly report summarizing how the U.S. banking system performed in the first quarter of the year. Obviously, banks had a difficult quarter because several of them failed in March, which dragged down the sector.
Investors have been carefully monitoring the banking sector to look for further signs of potential trouble and stabilization. "The more lasting effects of the industry's response to that stress may not become fully apparent until we've received the second-quarter results," FDIC Chair Martin Gruenberg said in a press briefing after the report was released.
While more time and data are likely required until there's further stabilization, let's assess what happened in the first quarter and look at where banks stand. Here are four takeaways from the FDIC's first-quarter report.
1. Deposits declined dramatically
In the first quarter, deposits declined a whopping $472 billion, which is the largest decline seen since the FDIC began collecting this data nearly four decades ago. While it's a startling number, it's not a huge surprise, given the notable pressure the industry saw on funding costs. Customers took advantage of the high-interest rate environment to pile into U.S. Treasury bills and certificates of deposits yielding 4% to 5%.
Roughly $313 billion of the decline came from noninterest-bearing deposits, which are those banks pay no interest on. The FDIC said in their report that the bulk of the decline was attributable to depositors with more than $250,000 in their accounts, which is above the threshold the FDIC insures.
Keep in mind that the banking problems began in March toward the end of Q1. That's why Gruenberg said second-quarter results are needed because the decline in deposits could continue in the second quarter.
2. Net interest margins took a hit
Funding and deposit costs are important because they impact a bank's net interest margin (NIM), which is a big indicator of profitability. The NIM is essentially the difference between the rate banks pay on their total funding base and the rate they make on their interest-earning assets.
Because deposits were funneling out of the system, banks had to pay up severely on deposits, which started to cut into their NIMs. That said, the NIM for all FDIC-insured banks only fell 7 basis points (1 bps = 0.01%) in Q1.
However, NIM erosion could be more pronounced in the second quarter. The FDIC breaks out NIMs by asset class. Banks with assets between $1 billion and $10 billion, most of which are community banks, saw the most margin compression in Q1, by far.
| Bank Asset Class | NIM Movement Q1 2023 |
|---|---|
| Greater than $250 billion | -0.01% |
| $10 billion to $250 billion | -0.07% |
| $1 billion to $10 billion | -0.22% |
| $100 million to $1 billion | -0.04% |
| Less than $100 million | 0.01% |
Source: FDIC.
3. Unrealized bond losses narrowed
As many will likely recall, banks got into trouble earlier this year as their bond portfolios got crushed in the face of rapidly rising interest rates. The problem became that if a bank lost too much of its deposits and had to sell bonds, which may have been trading at a loss, it destroyed shareholder equity. This aspect played a major role in the ultimate failures of SVB Financial, Silvergate Capital, and First Republic.
In the first quarter, bond losses in bank available-for-sale (AFS) and held-to-maturity (HTM) bond portfolios fell to $515.5 billion, which is more than $102 billion lower than the sequential quarter. Bonds that banks designated as AFS are those they intend to sell before they mature, while HTM bonds are intended to be held until they mature.
The losses have declined as shorter-term Treasury yields came down in late March, allowing banks to do some repositioning of their bond portfolios, although yields have since risen again. Total unrealized bank AFS losses stood at $231.6 billion at the end of Q1, while total unrealized HTM losses stood at $284 billion.
4. No major distress in commercial real estate ... yet
While investors are keeping a close eye on the credit trends of banks, particularly around commercial real estate, there hasn't been huge signs of distress in the actual numbers.
In the first quarter, the rate of loans past due for real estate loans secured by non-farm, non-residential properties jumped from 0.55% to 0.70%, although that's only up slightly year over year. The projected loan-loss rate went up from 0.06% to 0.09%. For real estate loans secured by multifamily properties, loans past due and projected losses ticked up slightly but still remained in good shape.
"Commercial real estate portfolios, particularly loans backed by office properties, face challenges should demand for office space remain weak and property values continue to soften," Gruenberg said in his remarks. "These will be matters of ongoing supervisory attention by the FDIC."
