Bank profits fall in fourth quarter, fueled by tax law changes

U.S. bank profits dropped 3.5 percent in the fourth quarter of 2017, in part due to one-time changes to the tax code, the Federal Deposit Insurance Corporation (FDIC) reported Tuesday.

The 5,670 FDIC-insured U.S banks made $25.5 billion in net income, 40.9 percent less than a year before, in the final quarter of 2017, thanks to a reduction in deferred tax assets cemented in the GOP tax-overhaul bill. Higher noninterest expenses and set-asides to cover loans likely to default also bit into banking profits.

Even without the tax changes, bank profits would have sunk to $42.2 billion, down 2.3 percent from a year ago.

FDIC Chairman Martin Gruenberg said “notwithstanding the one-time impact of the new tax law, the overall performance of the industry continued to be positive,” pointing to increasing loan balances and net interest margins in the fourth quarter.

“Despite the decline in net income, the banking industry continued to show steady improvement,” he said.

Net interest income grew by $10.2 billion in the fourth quarter, an 8.5 percent increase from a year ago, while noninterest income fell $202.4 million (0.3 percent).

Loan balances rose by $164.1 billion, a 1.7 percent increase from the previous quarter. Banks set aside 8.9 percent more money for expected loan defaults. The so-called loan-loss provisions increased $1.1 billion from a year ago to $13.6 billion.

Gruenberg warned banks against investing too heavily in bonds and “reaching for yield,” given the Federal Reserve’s plan to raise interest rates three times in 2018.

“An extended period of low interest rates and an increasingly competitive lending environment have led some institutions to reach for yield,” Gruenberg said. “This has led to heightened exposure to interest-rate risk, liquidity risk, and credit risk. These risks must be managed prudently for the industry to continue to grow on a long-run, sustainable path.”