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The Year in Review: Condition of the Federal Banking System

National banks and FSAs were generally profitable in 2016. System-wide return on equity (ROE) stood at 9.6 percent in the second quarter of 2016, slightly below the level of a year earlier. Net income fell by $1.5 billion during the first half of calendar year 2016 compared with the same period in 2015, reflecting a similar decline in noninterest income. Rising net interest income offset higher provision expenses. At community banks with less than $1 billion in assets, ROE rose over the same period, on the strength of both higher interest income and higher noninterest income. Across the federal system, credit quality remained solid, although charge-off rates in several categories edged higher over the last year.

Net income percent of total equity 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
All OCC-supervised institutions 7.264 12.906 16.383 15.957 15.752 15.177 14.717 14.120 15.497 13.635 13.883 15.692 16.459 13.806 12.810 13.232 9.069 3.050 0.056 7.122 8.324 8.875 9.829 9.059 9.420 9.352
OCC-supervised institutions with total assets under $1 billion 9.870 12.612 13.901 14.025 13.164 12.790 13.150 12.113 13.473 12.248 10.572 11.928 12.063 11.963 11.595 11.511 10.191 4.598 0.973 4.414 5.731 6.863 8.331 9.125 10.015 9.857

Discussion

For the first half of calendar year 2016, net income at OCC-supervised banks fell by $1.5 billion compared with a year earlier. System profitability as measured by ROE stood at 9.6 percent for the second quarter, slightly below the 10.0 percent posted a year earlier, and still well below pre-crisis levels. Profitability slipped at large banks, while holding steady for community banks. Banks still face pressure on net interest margins because of the unprecedented duration of the low interest rate environment. The factors supporting earnings growth since the end of the recession in 2009 — mainly falling loan-loss provisions and cost cutting—are not sustainable sources of profit growth.

Operating profit
Pre-provision net revenues rose by $0.7 billion (5 percent) in the first half of 2016 compared with a year earlier. Noninterest income, largely in the form of fees on bank products and services, fell by $1.4 billion, noninterest expense rose by $0.6 billion, and net interest income rose by a healthy $6.7 billion, reflecting growth in loans. A $5.9 billion increase in provisions nearly offset the growth in net interest income.

Loan-loss provisions are now running above net charge-offs again, modestly adding to the allowance for loan and lease losses.

System-wide net interest income grew 4.7 percent in the first half of 2016, compared with a year earlier, on solid growth in loan volume and little improvement in loan yields. As long as interest rates remain low, pressure is likely to continue on net interest income, the main source of revenue for most banks.

Community banks are posting higher ROE than larger banks. In the first half of 2016, net interest income for community banks rose 5.2 percent, compared with the previous year, on a 7 percent increase in loans on the books.

Smaller banks have not been as successful as their larger peers, however, in keeping down noninterest expenses, some of which are attributable to higher compliance and regulatory costs. Further, the steady decline in provisions, which boosted net income for several years, now appears to have reversed.

Loan performance
Loan performance improved steadily from 2010 to 2015. In the first half of 2016, charge-off rates edged up compared with 2015, led by higher loss rates in commercial and industrial loans and some consumer loans. Nonetheless, loss rates for all major loan categories remain below their 25-year averages.

To strengthen their positions, many banks raised additional capital over the last several years. The result is a more resilient banking system than existed before the financial crisis.

Percent of total loans 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
All OCC-supervised institutions 1.710 1.322 0.793 0.434 0.426 0.613 0.697 0.727 0.667 0.774 1.105 1.282 1.024 0.691 0.646 0.463 0.647 1.357 2.954 2.990 1.674 1.221 0.780 0.558 0.494 0.390
OCC-supervised institutions with total assets under $1 billion 0.948 0.741 0.428 0.309 0.322 0.467 0.388 0.489 0.484 0.422 0.379 0.401 0.438 0.279 0.214 0.193 0.271 0.623 1.169 0.968 0.764 0.614 0.314 0.186 0.130 0.107
Percent of total assets 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
All OCC-supervised institutions 61.99 59.54 60.40 61.26 63.40 64.90 63.49 63.21 64.90 65.07 62.38 62.52 61.21 56.49 57.04 56.22 56.80 53.33 52.36 52.49 52.41 51.69 51.60 50.79 52.88 52.25
OCC-supervised institutions with total assets under $1 billion 55.75 54.85 55.64 58.52 58.59 59.30 59.65 58.67 61.19 62.18 61.19 61.11 60.90 62.80 63.22 64.07 65.82 66.15 62.82 60.96 60.80 59.32 60.25 61.42 62.45 63.53