Financial Update (Fourth Quarter 2006)
Bank Profitability Strong
Pressure on net interest margins lowered returns on assets. Both short- and intermediate-term interest rates increased as the Federal Reserve tightened monetary policy, raising the federal funds rate 2 percentage points during 2005. Longer-term interest rates stayed low.
Overall economic health notable
Generally favorable U.S. economic conditions played a substantial role in banks' balance sheets. Throughout 2005, home mortgage loan rates were relatively low, rising slightly only toward the end of the year, the report noted.
Despite rising energy prices, consumer spending was still vigorous throughout the year. Household wealth rose in concert with substantial increases in housing prices and an improving labor market.
Sales and borrowing steam ahead
On the corporate side, profits and investment spending were up, fueled by robust sales growth. Business borrowing, especially commercial and industrial loans, picked up as merger and acquisition activity rose and stock buybacks grew significantly.
The total assets of all reporting U.S. bank holding companies grew from $6.7 trillion in 2000 to $11.2 trillion through the third quarter of 2005, according to the report. During the same period, return on average equity held stable at about 15.1 percent in 2005 versus 15.2 percent in 2000. Return on average assets moved up from 1.13 percent in 2000 to 1.25 percent in 2005.
The number of reporting bank holding companies in the study grew from 1,727 in 2000 to 2,288 in 2005.