Banking quick review: income statement

by PlanMaestro

As promised, this is BankRegData’s monthly comment follow-up. Some comments at the end.

Pre-Tax Net Operating Income hit $48.82 Billion (1.65%):

The quarter over quarter increase was $6.63 Billion. The $48.82 Billion figure is the highest since 2007 Q2 at $54.97 Billion (2.07%). The peak was $56.88 Billion in 2006 Q2 (2.29%).

Let’s look first at the big part of the pie which is Net Interest Margin:

Net Interest Margin is down $663 Million from last quarter. A couple of points here:

  • The $105.23 Billion represents the 6th straight quarterly decline from the Credit Card inflated peak in 2010 Q1.
  • Funding Costs continue to drop and are now sitting at 0.70%. Banks are clearing another $33 billion per quarter in lower Interest Expense costs compared to 3 years ago.
  • Interest Income (Yield) is dropping faster and sitting at 4.25% which is a historically low number.

So where did the increase in Pre-Tax NOI come from? Trading Gains:

Trading Gains once again made a disproportionate impact with a Q on Q increase of $5.55 Billion. JPM made up $4.55 Billion of the increase.

Other Non Interest Income observations:

  • Banks are once again finding ways to increase Service Charges income.
  • Investment Banking Income at $2.13 Billion is at least a nine year low.
  • Net Servicing Fees got hammered at a number of banks – especially JPM.
  • Income from Loan Sales is once again on the rise.

As an aside, Loans Held For Sale jumped $49.43 Billion Q on Q. Part of this ($8.14 Billion) is due to the conversion of OTS reporters (who did not previously report the item) to the OCC Call Reports. That means $41.28 Billion is newly marked for sale.

If you have any questions or suggestions feel free to contact me.

Bill Moreland


When discussing banks for the Charting Banking series I preferred to focus on the balance sheet (asset quality, capital and reserves). That was the key to assess if banks could manage the stress before regulators pull the plug.

It is about time to address the income statement. And yes, the banks in general are showing profits. Very large profits, even after provisions and write downs. And increasing.

However, Bill rightly notices  some weak spots:

  • NIM under pressure: both in absolute and percentage numbers. Lack of loan generation, pointed out in part 1, and all time low interest rates are starting to make a dent.
  • Large trading gains: that are not sustainable

Even without the jump in trading gains, the net operating income would have shown an increase over last Q ($43.2B adjusted for the increase) so I do not worry about the trading profits sustainability too much.

However, the net interest margin under pressure is very important and is a direct consequence of consumers delevering (fair to say they do not need more debt) and businesses not investing because of lack of demand.

The question is, when is loan demand going to jump start? I have an hypothesis, but for the moment I prefer to keep it to myself. At the same time this is not a life threatening issue with banks trading below tangible book value. Tangible book is a  good estimate of liquidation value so if the worse happens, and banks profits start to decline, the sector would still seem very cheap.

Bronte Capital was very early in noticing this possibility (while thinking it was not going to happen).  A very good example of hoping for the best but planning for the worst.

In fact he was so early that it was one of his first posts. At the time it was radical because everyone was fixed on the bad loans. He says he had only 20 readers. If that is the case I am honored!