The Federal Deposit Insurance Corporation (FDIC) has released its bank industry earnings report for 2017. While the profits would have been stronger than in 2016 without the impact of tax reform and the charges taken, most of the financial media reports are focusing on the net number after-tax charges showing that bank net income decreased in 2017 from in 2016.

Bank industry profits under net income fell to $164.8 billion in 2017 from $170.8 billion in 2016. Again, those are the net income numbers after items. While some of the non-current loans and charge-off data may have some increases, the good news is that these levels should be nowhere near any level that red flags need to be raised.

Without the changes to the tax law, the 2017 bank industry profits would have been a far more impressive $183.1 billion. The FDIC also indicated that there were improving net interest margins and higher loan balances for banks in 2017. Another benefit is that the list of “problem banks” continued to decline, falling to less than 100.

A further indication that the changes were tax related is that the FDIC showed that the fourth quarter’s net income of $25.5 billion was down $17.7 billion (or 40.9%) from the fourth quarter of 2016.

All major loan categories for the banking industry increased during the fourth quarter of 2017 from the prior quarter. Over the past year, loan and lease balances as a whole increased $416.1 billion (4.5%). These were broken down as follows:

• Credit card balances increased $69.6 billion (8.8%) from the previous quarter.
• Commercial and industrial loans grew $24.5 billion (1.2%).
• Residential mortgage loans rose $21.7 billion (1.1%).

For those economists, investors and economic data watchers, the numbers around the “non-current loan rate” were said to have remained stable. That said, the net charge-off rate increased slightly. The FDIC showed these in both groups, as follows:

• The amount of the loans that were noncurrent (90 days or more past due or in nonaccrual status) increased $1.5 billion (1.3%) during the fourth quarter.
• Noncurrent balances increased for residential mortgages (by 2.8 billion, or 5.2%) and credit cards ($1.2 billion, or 11.5%) but declined for commercial and industrial loans ($1.7 billion, or 8.5%).
• The average noncurrent loan rate remained unchanged from the previous quarter at 1.20%.
• Net charge-offs increased by $1 billion (8.6%) from a year ago, as the average net charge-off rate rose from 0.52% to 0.55%.

FDIC Chair Martin Gruenberg said of the bank income comparisons:

One-time charges resulting from the new tax law resulted in banks reporting lower net income in the fourth quarter and full-year 2017. Despite the decline in net income, the banking industry continued to show steady improvement. Loan balances grew, net interest margins increased, asset quality remained stable, and the number of ‘problem banks’ continued to fall.

Despite the gains overall, there are still some concerns. Gruenberg further said:

The operating environment for banks, however, remains challenging. An extended period of low interest rates and an increasingly competitive lending environment have led some institutions to reach for yield. 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.

The financial media is taking the net income side of this, without really addressing how these one-time charges are going to act as a profit bolstering mechanism for 2018 and beyond. Here are some of the major media headlines that show how this is being represented:

• Reuters: Tax overhaul shaves US bank profits 40.9 percent in fourth quarter: FDIC
• MarketWatch: Bank income tumbles as tax law takes a bite: FDIC
• American Banker: Bank profits plummet 41% on tax reform law: FDIC report
• Business Insider: Tax overhaul shaves US bank profits 40.9 percent in fourth quarter
• Wall Street Journal: Banking Industry Profits Drop on Tax Changes

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