If the indications from Federal Deposit Insurance Corporation (FDIC), the fund established by the US government to insure deposits of banks and institutions, are anything to go by, the worst does not seem to be over for the US financial markets.
FDIC said the banks and savings institutions on the 'problem list' grew to 117 in the second quarter of the calendar year 2008 against 90 in the first quarter. "More banks will come on the list as credit problems worsen. Assets of problem institutions also will continue to rise," said Ms Sheila C. Bair, Chairman, FDIC, in a statement.
FDIC reported that net income of commercial banks and savings institutions under its ambit plunged 87 per cent to $5 billion in the second quarter of the calendar year 2008 against $37 billion logged in the same quarter last year.
With the exception of the fourth quarter of last year, the Q2 earnings were the lowest for the industry since the fourth quarter of 1991, it said.
"By any yardstick, it was another rough quarter for bank earnings, but the results were not unexpected as the industry coped with financial market disruptions, housing slump, worsening economic conditions and the overall downturn in the credit cycle," said Ms Bair.
Total assets of problem institutions increased from $26 billion to $78 billion, with $32 billion coming from California-based IndyMac Bank, which failed in July.
Why the drop
The FDIC cited higher provisions for loan losses as the primary reason for the drop in industry profits. Loss provisions totalled $50.2 billion, more than four times the $11.4 billion the industry set aside in the second quarter of 2007. Almost a third of the industry's net operating revenue went to building up loan-loss reserves.
The size of the earnings decline was mainly attributable to a few large institutions, but more than half of all insured institutions (56.4 per cent) reported lower net income in the second quarter.
The industry reported lower non-interest income than a year earlier, reflecting continuing weakness in market-sensitive revenues, such as income from trading and securitisation activities. Proceeds from sales of securities and other assets yielded a net loss in the second quarter, compared to a net gain a year ago. Ms Bair also announced that in early October, the FDIC will consider a plan to replenish the agency's Deposit Insurance Fund which experienced a large drop due to added loss reserves for IndyMac and other bank failures
Via Thehindubusinessline
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