Problem banks down - first time since 2006

@CNNMoney August 23, 2011: 11:53 AM ET

NEW YORK (CNNMoney) -- The list of banks at risk of failing shrank in the second quarter -- the first time that has happened since before the financial crisis, according to a government report issued Tuesday.

But profit growth in the banking sector looks tenuous as revenues continue to falter.

The Federal Deposit Insurance Corporation announced Tuesday that its so-called problem bank list fell by 23 institutions to 865 at the end of the second quarter. That's down from 888 in the first quarter and marked the first decline since the third quarter of 2006.

The report also said that only 22 of the nation's 7,513 banks failed in the quarter, the lowest number since 2009.

"These trends are obviously favorable, but the current levels of both failures and 'problem' institutions remain very high by historical standards," said Martin Gruenberg, acting director of the FDIC.

Gruenberg, who was nominated last month to succeed Shelia Bair but has not yet been confirmed by the Senate, said the FDIC's insurance fund moved back into the black for the first time in nearly two years.

At the end of June, the fund had a positive balance of $3.9 billion. The insurance fund had a deficit of nearly $21 billion at the end of 2009 as a wave of bank failures drained its reserves.

"We continue to have sufficient liquidity to meet all of our obligations arising from past and future bank failures," said Gruenberg.

Bank of America's stock takes a beating ... again

However, the report highlighted the challenges facing the banking industry as the economic outlook darkens.

Shares of big U.S. banks have underperformed the broader stock market this year as investors worry about the legal and financial implications of their sub-prime mortgage portfolios.

Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500) and Citigroup (C, Fortune 500) have all suffered double-digit percentage drops in the stock market so far this year.

The FDIC also reported that banks earned nearly $29 billion in the second quarter, up $7.9 billion from the same quarter last year.

While bank profits have been on the rise for two years, the pace of earnings growth slowed significantly in the second quarter.

But the FDIC said profitability has been driven mostly by lower expenses for loan-loss provisions in recent quarters.

By contrast, bank revenues fell for the second quarter in a row, according to the FDIC's report. In the second quarter, net interest income declined by $1.9 billion and noninterest income fell by $1.1 billion.

The traditional business of lending and taking depostits made up roughly 70% of revenues in the quarter, according to the report.

Gruenberg acknowledged that earnings growth cannot be sustained without increased revenues. He added that loan loss provisions are approaching normal levels, which will put additional pressure on earnings.

However, the credit quality of banks' loan portfolios has improved in the wake of the financial crisis. In addition, loan balances increased by $64 billion in the second quarter, according to the report.

"Lending activity still has a long way to go before it approaches normal levels," said Gruenberg.

Meanwhile, bank loan-loss provisions fell 53% to a total of $19 billion. Loan-loss provisions have declined for seven quarters in a row, but the pace in the second quarter slowed significantly.

At the same time, the improvement in loan losses continued in the second quarter. Net loan charge-offs fell by nearly $21 billion, the largest drop since the banking sector began to recover from the 2008 crisis. To top of page

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