Wall Street Journal – by ROBIN SIDEL And SAABIRA CHAUDHURI
Banks are lending to companies and individuals at the fastest pace since the financial crisis, helping propel profits to near-record levels.
U.S. banks posted $40.24 billion in net income during the second quarter, the industry’s second-highest profit total in at least 23 years, according to data from research firm SNL Financial. The latest profits are just below the record $40.36 billion recorded in the first quarter of 2013.
The rebound comes even as bank executives say rising costs of regulation are hurting their businesses.
Banks set aside less money to cover soured loans, helping to boost profits. At the same time, overall loan growth increased at its fastest quarterly pace since the financial crisis, topping $8 trillion in total loans outstanding for the first time since SNL began tracking the data in 1991.
Commercial lending rose at an annualized 12.6% rate in the second quarter.
Growth in consumer lending, particularly student lending, auto loans and credit cards, also has picked up, to about 6% from 3% a year ago.
On the heels of the financial crisis, some lawmakers, regulators and consumers complained that banks weren’t lending enough. But steady improvement in credit quality, or borrowers’ ability to repay loans, is prompting banks not only to lend more but also to ease their standards.
The improving picture reflects a healing of the U.S. economy five years after the official end of the recession that began in late 2007. White House officials on Friday said the U.S. labor market is about 80% back to precrisis levels.
“Everyone is delighted to see a resurgence of bank earnings that is consistent with the economic recovery nationwide,” said John Kanas, an industry veteran who is now chief executive officer of BankUnited Inc., a lender based in Miami Lakes, Fla.
So far, the results haven’t impressed investors, who remain concerned about a range of headwinds facing the industry, from growing regulatory costs and stubbornly low interest rates to steep slowdowns in mortgage lending and securities-trading revenue. Such issues have weighed on other measures of bank health, such as the returns lenders generate on their equity.
The KBW Bank Index, which tracks the stocks of 24 banks, is down 0.9% so far this year, compared with a 4.8% rise for the S&P 500 index.
Still, it has taken years for the nation’s banks to get back on track since getting pummeled in the financial crisis by soured loans and bad investments.
“The second quarter was an inflection point in the profitability story for banks,” said SunTrust analyst Eric Wasserstrom. “The bad is starting to bottom out, the good is starting to gain momentum.”
In part, the recovery has been slow because the depth and breadth of the financial crisis took many bank executives by surprise, coming after years of bumper profits driven by the housing boom and low default rates on loans. Banks earned $40.21 billion in the last three months of 2006, the industry’s third-most-profitable quarter, as mortgage lending surged. Figures from SNL, which is based in Charlottesville, Va., aren’t adjusted for inflation.
This time, the growth is being driven primarily by business loans.
“It’s definitely a lot easier [to get a loan]. There is no question about it,” said Randy McCullough, chief executive of Charles & Colvard Ltd, a jewelry company based in Morrisville, N.C. The company recently closed on a three-year, $10 million credit facility with Wells Fargo WFC -0.22% & Co.
Banks’ willingness to lend has also been good news for STW Resources Holding Corp., a water-reclamation and oil-field-services company that recently received a $3.5 million line of credit.
“Credit lines are opening up nicely in the form of equipment and project finance,” said Paul DiFrancesco, the head of finance and business development for the Midland, Texas, company. Mr. DiFrancesco declined to name the bank that granted the credit.
Regional banks reported the strongest growth in commercial and industrial lending during the second quarter. Cleveland-based KeyCorp, for example, posted a 13.4% increase in commercial, financial and agricultural loans from the year-earlier period, to $26.4 billion, helping to drive a 5.5% gain in loans overall.
Citigroup Inc. C +0.10% delivered a 3.7% gain vs. the year before in total loans outstanding. Wells Fargo & Co. and J.P. Morgan Chase JPM +0.05% & Co. logged gains of 3.6% and 2.9%, respectively.
The higher loan levels come as banks are easing up on their underwriting standards to borrowers. A Federal Reserve survey of senior loan officers released last week found that lenders were loosening standards and loan terms for commercial and industrial loans and commercial real-estate loans.
Several large banks had said they had eased standards, raised credit limits and reduced the minimum required credit score for credit-card loans, according to the survey.
Banks also saw their second-quarter profits lifted by a reduction in the amount of money they set aside to cover future bad loans. So-called provision expenses fell to $6.59 billion in the second quarter from $7.61 billion in the first quarter and $8.53 billion in the second quarter of 2013.
Big banks are still releasing some of those reserves, an action that pumps up profits. The four largest U.S. banks—J.P. Morgan Chase, Citigroup, Bank of America Corp. BAC -0.07% and Wells Fargo—released a total of $2.25 billion of reserves in the second quarter, up about 20% from the first quarter.
The improving profit picture isn’t trickling down to bank investors, however, because analysts and investors remain concerned about the long list of obstacles facing the industry.
One important measure of bank profitability is return on equity, or the amount of profit a bank generates as a percentage of shareholders’ equity.
RBC Capital Markets analyst Gerard Cassidy notes that the 20 largest banks he covers reported a median return on equity of 9.3% in the second quarter, up from 8.4% in the first quarter. But a return on equity below 10% “is one of the biggest obstacles to higher stock valuations,” he said.
Write to Robin Sidel at email@example.com and Saabira Chaudhuri at firstname.lastname@example.org