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Report on the Condition of the U.S. Banking Industry: Third Quarter, 2005

Aggregate assets at all reporting bank holding companies increased 2.6 percent, or $282 billion, to $11.2 trillion, with much of the growth coming from loans to finance real estate. Earnings were strong despite somewhat higher provisions that arose mainly from the summerís Gulf Coast hurricanes. Nonperforming asset measures stayed at a historically low level.

Loans advanced 2.8 percent ($152 billion), to $5.5 trillion, fueled primarily by increases in residential mortgages ($65 billion) and commercial real estate loans ($47 billion). Construction loans, which include loans to finance the construction of new homes, accounted for roughly half of the increase in commercial real estate lending. Loans to individuals other than for credit cards or mortgages continued to grow at an elevated pace, up 4.4 percent, or $22 billion. Growth in commercial and industrial loans decelerated from 3.8 percent in the previous quarter to 1.1 percent, or $11 billion. Similarly, the pace of increases in home equity lines of credit slowed in response to higher interest rates, falling to just 0.3 percent, or $1.3 billion. More generally, unused commitments to lend increased significantly, rising 4.1 percent ($206 billion), to $5.2 trillion, consistent with reports of a robust outlook for business loans.

Money market assets also increased substantially ($71 billion)--as did money market borrowings ($75 billion)--almost entirely at one of the five large bank holding companies for which banking operations represent only a small component of the consolidated entity.1 Investment securities expanded 2.6 percent, or $48 billion, to $1.9 trillion, with most of the growth in Treasury and other debt securities.

Funding for the growth in assets was evenly balanced between deposits and short-term borrowings. Deposit growth for the quarter was concentrated in time deposits and MMDA and savings accounts, shifting the overall deposit composition toward higher-cost categories as transaction accounts declined. At 1.9 percent ($103 billion), overall deposit growth lagged the growth in loans, pushing the loan-to-deposit ratio up slightly to 99.2 percent.

Tier 1 and total risk-based capital ratios fell modestly to 9.16 and 11.9 percent, respectively, continuing the modest downward trend seen over the past two years. The leverage ratio, however, remained roughly unchanged at 6.53 percent.

Third quarter net income for all reporting bank holding companies rose six percent ($2.0 billion), to $34.7 billion, lifting quarterly returns on equity and assets to 15.14 percent and 1.25 percent, respectively, near historic highs. A surge in noninterest income, spurred by strong trading revenues at large institutions, contributed significantly to earnings improvement. Net interest margins narrowed further, down three basis points, to 3.06 percent, due to a flatter term structure, continued competition for loans and deposits, higher short-term funding rates, and a shift in deposit mix toward higher-cost certificates of deposit. Nonetheless, net interest income increased because of asset growth.

Moderating the improvement in earnings, a substantial increase in provisions for loan losses augmented loan-loss reserves for the first time since early 2004. Large institutions with credit exposures on the Gulf Coast accounted for almost half of this increase. Further contributing to escalating provisions were anticipated losses (largely on credit cards) from stepped-up personal bankruptcies filed before the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and, to a lesser extent, the introduction of higher minimum credit card payments. Despite the hurricanes and other one-time factors, however, the nonperforming assets ratio declined slightly during the quarter to a low 0.70 percent.

Assets at the fifty large bank holding companies increased just 0.9 percent, or $75 billion, influenced significantly by Citigroupís sale of life insurance and annuities operations to an insurance-focused bank holding company (MetLife) during the quarter. Although this transaction had no net effect on the assets of all reporting bank holding companies, aggregate earnings reflected the $2.1 billion gain realized by Citigroup on this sale.


1. Financial information for five large bank holding companies (BHCs) for which banking operations represent only a small component of the consolidated entity is included in the all reporting bank holding company data shown in table 1, but not in the data for the fifty large bank holding companies (table 2) or in the data for all other reporting bank holding companies (table 3). Three of these BHCs are insurance-oriented and two are brokerage-oriented. At the end of the third quarter, these five BHCs had combined assets of $925.8 billion, more than half in the securities and money market assets category. For further background on the institutions included in each tableís data, see Board of Governors of the Federal Reserve System (2004) "Report on the Condition of the Banking Industry: Third Quarter, 2003."  Return to top

 

Table 1: Financial characteristics of all reporting bank holding companies in the United States

Table 2: Financial characteristics of fifty large bank holding companies in the United States

Table 3: Financial characteristics of all other reporting bank holding companies in the United States

Table 4: Nonfinancial characteristics of all reporting bank holding companies in the United States