Banking

U.S. commercial banks and nondeposit trust companies continued to face significant challenges in 2009, according to a May article in the Federal Reserve Bulletin. Among the challenges were deteriorating asset quality, a decline in lending activity, and a growing list of troubled banks and bank failures, said the article, which used call report data to review banking conditions during the previous year.

Profitability, lending decline across industry
Although the overall profitability of the U.S. banking sector was low, the largest U.S. banks fared better than the rest of the industry. Large banks as a whole reported a small profit in 2009, while small and medium-sized banks saw their profits decline further. This divergence was mostly due to large banks' ability to generate income from trading and other specialized activities, call report data showed.

Bank balance sheets contracted sharply in 2009 as banks' raised capital and nominal assets declined on an annual basis for the first time since 1948. Loans outstanding decreased in all categories, but the decline was especially marked in loans to businesses. Indeed, commercial and industrial (C&I) loans on bank books fell nearly 19 percent last year, the biggest decline in at least 25 years, said the report. Several factors contributed to the decline in lending, including deteriorating asset quality among potential borrowers, tighter lending standards and terms, and lower demand from creditworthy borrowers, the Bulletin article said.

More challenges ahead for banks
Bank profitability has improved in the first quarter of 2010 and many banks are starting to see early signs of improving credit quality. The four largest bank holding companies reported profits for the first quarter of 2010, said the report, but regional and smaller banks are still being challenged by issues such as credit losses on their core lending operations.

May 28, 2010