Bair: Bad Loans Mounting for U.S. Banks

Thursday, May 28, 2009 8:42 AM

The U.S. banking sector swung to a collective profit in the first quarter after posting a loss in the fourth quarter, despite a rise in bad loans, a federal government agency said Wednesday.

The Federal Deposit Insurance Corporation (FDIC), which insures bank and thrift deposits for at least 250,000 dollars, said that those institutions reported net income of 7.6 billion dollars in the first quarter, a decline of 61 percent from a year ago.

In the 2008 fourth quarter, they had posted their first quarterly loss since 1990, more than 26 billion dollars.

Of the FDIC-insured banks, one in five was unprofitable in the first quarter and three in five insured institutions reported lower net income, the agency noted in a statement.

"The first quarter results are telling us that the banking industry still faces tremendous challenges, and that going forward, asset quality remains a major concern," said FDIC chairman Sheila Bair.

Mounting bad loans put additional pressure on bank balance sheets amid a severe recession and a global financial crisis that originated nearly two years ago in the US home mortgage sector.

The FDIC said its insured institutions charged off 37.8 billion dollars in bad loans in the first quarter, almost twice the 19.6 billion dollars of the 2008 first quarter.

The amount of bad loans and leases rose by 59.2 billion dollars during the quarter, and were 154.3 billion dollars higher than a year ago.

Bair said that the costs associated with impaired assets were "weighing heavily" on the industry's performance.

"Nevertheless, compared to a year ago, we see some positives. Net interest income is higher, and noninterest revenue is up at larger banks, particularly trading revenues," she said, adding that gains on securities and other assets had improved.

"But these positive factors were outweighed by higher expenses for bad loans and for goodwill impairment," Bair said.

The agency said that insured institutions set aside 60.9 billion dollars in provisions for loan losses in the first quarter, a 63.6 percent increase from the first quarter of 2008.

Expenses for goodwill impairment and other intangible asset expenses soared 121 percent, to 7.2 billion dollars, from a year earlier.

During the first three months of the year, 21 banks failed, the largest number since the 1992 fourth quarter, and the number of "problem" banks increased to 305 from 252.

"We're now in the cleanup phase for the banking industry. It will take some more time. But in the end, we'll have a stronger banking industry that's better able to meet the demand for credit as the economy recovers," Bair said.

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