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Tax reform charges muddy banks' improving Q4 profits

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Tax reform charges muddy banks' improving Q4 profits

The banking industry reported a messy fourth quarter in 2017 as an increased number of institutions generated net losses due to charges related to the U.S. tax reform bill signed into law in late 2017.

According to call report data compiled by S&P Global Market Intelligence, the banking industry's net income fell steeply to $25.77 billion in the fourth quarter of 2017 from $47.95 billion in the third quarter of 2017 and $43.18 billion in the fourth quarter of 2016.

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Figures for prior periods reported in this article may not match figures reported in prior articles due to banks' frequent restatements of prior-period call reports.

Nine-hundred and nine, or 16%, of commercial banks, savings banks and savings and loan associations reported negative net income for the fourth quarter, compared to 507, or 9%, of institutions that reported net losses in the fourth quarter of 2016. 2017 saw the highest percentage of banks reporting fourth-quarter net losses since 2011, when 20% of banks reported fourth-quarter net losses.

Losses were driven by a spike in income tax expense due to the tax reform bill, which lowered corporate taxes for coming years, but also prompted fourth-quarter writedowns of deferred tax assets. Aggregate fourth-quarter income tax expense jumped to $34.99 billion from $18.44 billion in the fourth quarter of 2016. A large part of the increase was a $12.86 billion tax expense taken by Citigroup Inc. unit Citibank NA.

While banks' bottom lines took hits, the underlying core profitability of banks improved. The net interest margin, which measures net interest income earned as a percent of earning assets, widened to 3.26% across all banks, the highest level since the fourth quarter of 2012.

Loan yields increased and loan growth improved compared to prior quarters and helped boost the margin. The industry's yield on loans and leases rose to 5.01% in the fourth quarter from 4.70% a year ago. While loan growth was down compared to the year-ago quarter, the fourth quarter was the highest growth quarter of 2017. Loans were up 4.5% in the fourth quarter, year over year, and were up 1.7%, quarter over quarter.

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A major component of loan growth this quarter was credit card loans. Credit card loans held by banks were up by 8.2% as of Dec. 31, 2017, compared to Dec. 31, 2016. A year ago, credit card loans increased at banks by just 5.8% compared to the prior year. Heavy lifters one- to four-family closed-end first lien loans and commercial and industrial loans also saw improved loan growth rates compared to the year-ago quarter. Auto, commercial real estate and multifamily loans continued to see declining year-over-year growth rates.

Yields also improved across loan types, with the largest increases seen at commercial and industrial loans, whose yield grew by 47 basis points compared to the year-ago quarter, and credit card loans, where the aggregate yield grew by 44 basis points.

Noninterest income, which generally equates to about half of the industry's net interest income, was almost flat with the year-ago quarter, growing by just 0.2%.

Loan quality continued to show few signs of deteriorating. While delinquency rates were down compared to the year-ago quarter, charge-offs and provisioning were up slightly. Annualized net charge-offs as a percent of total loans were up by 2 basis points to 0.54% and the loan loss provision grew to 103.2% of net charge-offs from 103.0% of net charge-offs.

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The data in this article was compiled using aggregated call report data for commercial banks, savings banks and savings & loan associations. The aggregated data can be downloaded from the Regulated Depositories section of the Data Wizard of the MI Excel add-in.