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Big quarter for banking industry as Q2 profits hit new high

Banks and thrifts saw a big jump in profits in the second quarter of 2017, despite weak loan growth, due to a widening in the industry's aggregate net interest margin combined with an increase in efficiency.

"I think 58% of the 208 banks that we follow beat estimates and part of the reason was because deposit costs were a little more under control than we expected," Keefe Bruyette & Woods CEO Thomas Michaud told S&P Global Market Intelligence.

According to call report data collected by S&P Global, the banking industry earned a collective $48.30 billion in the second quarter, up 9.9% from the prior quarter and up by 10.8% from the year-ago quarter. The aggregate quarterly income amount is the highest ever recorded in SNL's database, which dates back to 1990.

The industry's return on average assets increased considerably to 1.14% from 1.05% in the prior quarter.

"The industry had a very good quarter," Michaud said. "The industry's fundamentals continue to get better."

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Earnings growth was partly driven by a 5-basis-point increase in the aggregate net interest margin to 3.18% in the second quarter. The margin was up by 16 basis points compared to the second quarter of 2016.

The expanded NIM drove an increase in net interest income of 2.3% during the second quarter and of 9.3% compared to the year-ago quarter. Noninterest income growth was lower year over year, rising by just 1.1%.

Also boosting the industry's profits was an improved efficiency ratio, which fell to 56.32% from 58.76% in the prior quarter and 57.79% in the year-ago quarter. The efficiency ratio represents total noninterest expense excluding amortization of intangibles and goodwill impairments, as a percent of operating revenue. The substantial decline between the first quarter and second quarter ratios was a combination of a decrease in noninterest expense and the aforementioned increase in net interest income.

While there was some loan growth in the period, an improvement compared to the decline in loans in the first quarter, it was tepid at just 1.7% from the prior quarter and 3.7% from a year ago. C&I loans, which had long been a driver of loan growth since the one- to four-family mortgage bubble burst in 2008, grew by only 2.8% year over year.

Loan yields on C&I loans, however, shot up by 38 basis points from the year-ago quarter to an aggregate 4.13%. Yields on total loans & leases grew to 4.81% from 4.59% a year ago. Banks' cost of funds were up by just 9 basis points compared to a year ago, enabling an expansion in margin.

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Deposits grew by less than 1% to $13.11 trillion from $13.08 trillion in the prior quarter and by 4.6% compared to the year-ago quarter.

Banks still have yet to see an uptick in delinquencies or charge-offs.

"The banking system is in great shape. We've got the most capital we've had in 70 years, credit quality is excellent and I think you're seeing industry evolve for the new fintech environment," Michaud added.

There was also not much movement in the aggregate loan loss provision, which moved up slightly to $12.05 billion, or 106.9% of net charge-offs, in the quarter, from $12.02 billion in the prior quarter and $11.76 billion a year ago.

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The data in this article was compiled using SNL's 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 SNL Office.