Lower credit loss provisions drive increased profitability at US banks

With substantially smaller credit loss provisions, U.S. banks and thrifts reported higher profits in the fourth quarter.

Net income across the industry was $59.93 billion, up $8.75 billion, or 17.1%, on a linked-quarter basis and the highest level since the second quarter of 2019. The $2.66 billion gain in net interest income was more than offset by the $2.27 billion decrease in noninterest income and the $1.45 billion increase in noninterest expense.

A diminished credit loss provision fueled net income growth. The provision declined to $3.60 billion from $14.31 billion, pulling the quarterly provision to net charge-offs ratio below 100% for the first time in more than five years. Several of the largest banks recorded a negative provision, including JPMorgan Chase Bank NA, Wells Fargo Bank NA and PNC Bank NA. Depending on the economic outlook, the industry could continue drawing down reserves in the first half of 2021.

After seven consecutive quarters of net interest margin compression, NIM was flat relative to the third quarter of 2020 at 2.63%. The acceleration of deferred fee income related to Paycheck Protection Program loan forgiveness and paydowns contributed to the margin stabilization. Regional banks that expanded their NIM by at least 5 basis points during the quarter included KeyBank NA, New York Community Bank and East West Bank.

While total assets continue to climb, the balance sheet composition of the industry is changing. Quarter-over-quarter loan growth was negative 0.5%, representing the second consecutive quarter of a shrinking loan base. On the other hand, total securities have been increasing for the last two years and were up 6.7% from Sept. 30, 2020.

The majority of the industry grew securities, but Bank of America NA was an outlier, adding more than $100 billion to its portfolio during the quarter. Most of its purchases were mortgage-backed securities that mature or reprice after more than 15 years. On Bank of America Corp.'s Jan. 19 earnings conference call, CFO Paul Donofrio cited the company's "relatively recent confidence to invest the excess [deposits] in securities instead of holding that excess in cash." He declined to provide guidance on future purchases but said the company expects to continue to deploy more cash into securities.

Loan deferrals and government guarantees have kept a lid on charge-off activity. Net charge-offs as a percentage of average loans improved to 0.41% from 0.46% in the third quarter of 2020 and 0.54% in the year-ago quarter.