US Bank Earnings Up Nearly 13 Percent in 3Q

The data issued Tuesday by the Federal Deposit Insurance Corp. showed strength in the banking industry more than eight years after the financial crisis struck. However, the impact of low oil prices on energy companies led banks to continue to post bigger losses on commercial and industrial loans. Some energy companies have struggled to repay loans, causing distress for banks in oil and gas producing regions.

The FDIC reported that U.S. banks earned $45.6 billion in the third quarter, up from $40.4 billion a year earlier.

Almost 61 percent of banks reported an increase in profit from a year earlier. Only 4.6 percent of banks were unprofitable, down from 5.2 percent in the third quarter of 2015 and the lowest percentage since the third quarter of 1997.

The FDIC said net interest income increased by $10 billion, or 9.2 percent, from a year earlier.

As a sign of a healthy banking industry, the interest income earnings were boosted by a $112 billion, or 1.2 percent, increase in lending in the third quarter. The largest increases came in mortgage lending and credit cards.

The volume of commercial and industrial loans that were written off in the third quarter jumped by $946 million, or 82.7 percent.

Despite the relatively strong quarter, the banking industry "faces continued challenges," FDIC Chairman Martin Gruenberg said at a news conference. He noted the sustained period of low interest rates in recent years which has crimped banks' profit margins on loans.

Gruenberg added that "banks must position themselves for rising interest rates going forward."

Since the surprise election of Donald Trump, long-term interest rates have climbed, propelled largely by investors' belief that his plan to cut taxes and spend massively on roads, bridges, airports and other infrastructure could ignite inflation. When they foresee rising inflation, bond investors demand higher long-term rates and pay lower prices for bonds.

Banks could earn more interest on loans. On Wall Street, the anticipation of higher rates has helped push up prices of bank stocks — in some cases, to their loftiest levels in years. Also stoking the rise are expectations that regulations affecting the banking industry will be eased in a Trump administration.

More immediately, Federal Reserve policymakers are expected to raise the central bank's benchmark rate at their Dec. 13-14 meeting for the first time in nearly a year. Fed Chair Janet Yellen recently told Congress that the case for a rate boost has "continued to strengthen." She also indicated that the election of Trump hasn't changed Fed thinking on the timing of the next rate increase.

Gruenberg has said that higher interest rates could be "a double-edged sword" for the banking industry. While bringing in more interest on loans, it also could increase the cost for banks to borrow to fund the loans they make.