U.S. Banks Growing More Profitable

European banks may be teetering on the edge of the financial abyss, but U.S. banks are gradually becoming more profitable, recovering from a three-year liquidity crisis, according to the latest report from the Federal Deposit Insurance Corporation (FDIC).

FDIC-insured financial institutions reported a profit of $28.8 billion in the second quarter of 2011, a $7.9 billion improvement from the $20.9 billion in net income the industry reported in the second quarter of 2010.

This is the eighth consecutive quarter that earnings registered a year-over-year increase, thanks in large part to the Federal Reserve's pumping of trillions of dollars into the financial system. Banks were more profitable in the last quarter mainly due to lower loan losses.

Gradual but steady progress

"Banks have continued to make gradual but steady progress in recovering from the financial market turmoil and severe recession that unfolded from 2007 through 2009," said FDIC Acting Chairman Martin J. Gruenberg. He added that "this trend has expanded to include a growing proportion of insured institutions."

Sixty percent of banks reported improvements in their quarterly net income from a year ago. The number of institutions reporting net losses for the quarter fell to 15.2 percent, down from 20.8 percent a year earlier. The average return on assets, a basic yardstick of profitability, rose to 0.85 percent, from 0.63 percent a year ago.

Fewer 'problem' banks

While banks are still failing – four closed their doors last week – the number of institutions on the FDIC's "Problem List" fell for the first time in 19 quarters. The number of "problem" institutions declined from 888 to 865. This is the first time since the third quarter of 2006 that the number of "problem" banks fell.

In more good news, the Deposit Insurance Fund (DIF) balance – money set aside to reimburse depositors when a bank fails - was positive for the first time in two years. The DIF balance — the net worth of the fund — rose from a negative $1 billion to a positive $3.9 billion during the second quarter.

The increase in the fund balance stemmed primarily from assessment revenues and fewer expected bank failures, the agency said.