Bank earnings at highest since first half 2007, but lending slackens

WASHINGTON, Thu May 24, 2012 – The banking industry enjoyed its highest earnings since the first half of 2007 in the first quarter, but lending slowed, reversing what had been an encouraging trend in loan growth.

The Federal Deposit Insurance Corp.’s quarterly report, released on Thursday, showed the industry earned $35.3 billion in the first quarter, up $6.6 billion, or 22.9 percent, from a year earlier. The increase was largely due to banks setting aside less money to guard against loan losses.

Banks pulled back on lending during the first quarter as loan balances dropped for the first time in four quarters.

FDIC Acting Chairman Martin Gruenberg cautioned that it is too soon to draw conclusions about the lending drop after only one quarter but said “the overall decline in loan balances is disappointing after we saw three quarters of growth last year.”

Overall loan balances declined by $56.3 billion, or 0.8 percent, during the first quarter.

Until lending picks up considerably it will be difficult for the U.S. economy to gain steam and for banks to continue recording the profits they have shown in recent quarters.

Gruenberg said one factor in the drop in loan balances was seasonal, noting that credit card lending went down following the end-of-year holidays.

The data also showed, however, that housing remains a persistent problem.

Residential real estate loan balances fell by $19.2 billion, or 1 percent, during the quarter.

A bright spot continues to be lending to businesses, with loan balances in this category growing $27.3 billion, or 2 percent, during the first quarter.

“Total lending volumes continue to suffer solely because of weakness in the housing sector,” said Jim Chessen, chief economist at the American Bankers Association. “The overall lending volume for banks will continue to grow at a gradual pace until the housing market improves.”

Gruenberg warned that the European financial crisis is a major threat to the U.S. banking industry going forward.