Bulls Keep Control in Another Record-setting Session with Domestic Banks Leading

#banks #domestic #profits #virus #chaos

$KBE

US bank profits were significantly higher in Q-3 than 1-H of Y 2020, still the industry lags behind Y 2019 marks.

The industry’s profits jumped 173% in Q-3 to $51.2-B, after firms spent 1-H of the year setting aside billions of dollars to offset expected virus epidemic-driven losses. But that amount is still 10.7% lower than Y 2019 marks, and about 50% of banks reported lower profits than a year prior.

The banking industry remains well-capitalized with ample liquidity and has, to date, weathered the economic effects of the pandemic,” said FDIC Chairman McWilliams in a statement.

The new data suggests some return to normalcy for banks after a difficult 1-H of the year. Bank profits were down 70% in the 1st 2 Quarters as firms built up massive cushions to guard against future losses.

The sizable increase in profits from the 2nd to the 3rd Quarter was due in large part to banks slowing such aggressive preparations.

The FDIC reported provisions for credit losses fell 76.8% from the 2nd Quarter. Although there were still some signs of potential Southside action, as the share of unprofitable banks rose to 4.7%, and noncurrent loan balances rose 7.9%.

The FDIC also reported that an explosion in bank deposits appears to have slowed. The uncertainty brought on by the virus chaos drove businesses and individuals to deposit over $2-T in banks in 1-H of the year, but total deposit balances rose just $156-B in Q-3.

The influx of deposits actually resulted in the FDIC’s deposit insurance fund dropping below its legally required minimum ratio of 1.35%. That level now stands at 1.3%, and banks could be required to pay more to boost it if it does not rise on its own in coming months. 

Banks derive greater net interest margins on bank deposits when longer-dated yields are much higher than shorter-dated yields. This widening trend is good for bank profitability. The SPDR S&P Bank ETF (NYSEArca:KBE) 39.70, +1.08, or +2.8% Tuesday. 

The steepening is being caused by selling in longer-dated maturities, which is indicative of investors feeling better about the economic outlook and having greater expectations for inflation. The benchmark 10-yr yield is up 9 bpts to 0.93%, widening the 2s10s spread to a Y 2020 high of 76 bpts. 

Economist Bruce WD Barren notes: “Bank exchange-traded funds (ETFs) offer investors exposure to the banking and financial sector of the economy. Banking services include taking deposits, making loans, and facilitating payments. Other financial services include investment management, retirement planning, insurance, and brokerage services. Aside from charging fees for these services, banks earn profits by charging higher interest rates on the loans they make than the rates they pay on their customers’ deposits. Bank ETFs are a way for investors to share in these profits by investing in a basket of banks and other financial services companies.”

Have a healthy day, Keep the Faith!

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