A dismal banking environment and a very weak economy continued to wreak havoc on bank balance sheets and income statements in the fourth quarter, resulting in an awfully poor showing in earnings and asset quality at District banks and their U.S. peers.
At District banks, return on average assets (ROA) fell 22 basis points to 0.45 percent in the fourth quarter. ROA was down 49 basis points from its year-end 2007 level. (See table.) Profitability at U.S. peer banks (banks with average assets of less than $15 billion) plunged in the fourth quarter, resulting in year-end ROA of just 0.15 percent, a 29 basis point drop from its third quarter level and a stunning 90 basis point decline from its year-end 2007 level.
The double-digit declines in ROA in the fourth quarter at both sets of banks were due to large increases in net noninterest expense and loan loss provisions; the average net interest margin stayed flat at 3.79 percent for District banks and 3.82 percent at peer banks.
Loan loss provisions as a percent of average assets climbed to 0.74 percent at District banks and 1.03 percent at U.S. peer banks. The LLP ratio has more than doubled at District banks and has almost tripled at peer banks over the past year.
Despite the large increases in provisions, the coverage ratio (the loan loss reserve as a percentage of nonperforming loans) has tumbled significantly at both sets of banks over the past two years. At year-end 2006, District banks had $1.78 reserved for every dollar of nonperforming loans; at year-end 2008, the coverage ratio stood at just 84 cents. U.S. peer banks had just 65 cents reserved for every dollar of nonperforming loans, down dramatically from $1.83 at year-end 2006.
Increases in loan loss provisions and declines in coverage ratios can be traced to continued deterioration in asset quality at District and U.S. peer banks. The ratio of nonperforming loans to total loans rose to 1.76 percent at District banks and 2.63 percent at peer banks in the fourth quarter. In the District, increases in nonperforming commercial and industrial loans and commercial real estate loans were the main contributors to the rise in the composite nonperforming loan ratio. More than 5 percent of District banks’ outstanding construction and land development (CLD) loans were nonperforming at the end of the fourth quarter. At U.S. peer banks, the decline in quality was even more pronounced, with almost 9 percent of outstanding CLD loans in nonperforming status.
Despite the dreary earnings and asset quality numbers, District banks remain on average well-capitalized. At the end of the fourth quarter, only one District bank (out of 700) failed to meet at least one of the regulatory capital minimums. District banks averaged a leverage ratio of 8.99 percent.
|Q4 2007||Q3 2008||Q4 2008|
|Return on Average Assets|
|Net Interest Margin|
|Loan Loss Provision Ratio|
|Nonperforming Loans Ratio|
SOURCE: Reports of Condition and Income for Insured Commercial Banks
Banks with assets of more than $15 billion have been excluded from the analysis. All earnings ratios are annualized and use year-to-date average assets or average earning assets in the denominator. Nonperforming loans are those 90 days or more past due or in non-accrual status.