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Margin expansion driving increases in US bank profitability

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Margin expansion driving increases in US bank profitability

Thanks to a bulging net interest margin, net revenue across the U.S. banking industry reached another all-time high in the third quarter of 2022. Wider margins more than offset shrinking balance sheets, weaker fee income and higher expenses, according to S&P Global Market Intelligence data.

Record net revenue and higher provision

Pre-provision net revenue, which is net interest income plus noninterest income minus noninterest expense, vaulted to $103.86 billion in the third quarter, up 11.5% from the previous record set in the second quarter. Net interest income, which was 8.9% higher quarter over quarter, was the only one of the three components with a positive contribution. Noninterest income fell 1.9%, and noninterest expense increased 1.0%.

Even though net income was 9.5% higher sequentially, the industry's level of provisioning prevented a record-breaking quarter. The credit loss provision was up for the sixth-consecutive quarter. At $13.05 billion, the third-quarter provision was around the middle of the range set between 2016 and 2019.

Just three of the 48 banks and thrifts with greater than $50 billion in total assets and a loans-to-deposits ratio greater than 25% at Sept. 30 recorded a negative provision: Morgan Stanley unit Morgan Stanley Bank NA, Cullen/Frost Bankers Inc. unit Frost Bank, and BNP Paribas SA unit Bank of the West.

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Margin expansion for most companies

Net interest income growth came from margin expansion. The net interest margin on a fully taxable equivalent basis was 3.01%, up from 2.74% in the second quarter, and it represented the highest level since the first quarter of 2020.

Most of the industry was able to take advantage of rising rates through charging higher loan yields while mitigating the rise in funding costs. The aggregate yield on loans and leases rose 56 basis points, outpacing the 32-basis-point rise in cost of deposits.

Almost all of the $50 billion-plus companies reported a higher margin. Some standouts with more than 70 basis points of improvement were Comerica Inc. unit Comerica Bank, merger target First Horizon Corp. unit First Horizon Bank, and M&T Bank Corp. unit Manufacturers and Traders Trust Co.

On the other hand, a few large companies suffered margin contraction. New York Community Bancorp Inc. unit New York Community Bank's margin was 30 basis points lower quarter over quarter, while First Republic Bank's margin was down 8 basis points.

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Balance sheet composition changing

For the second-consecutive quarter, the banking industry collectively got smaller. Total assets at Sept. 30 were down 1.0% from June 30.

Total loans and leases were up for the sixth-consecutive quarter, but the 0.9% growth rate slowed significantly from the second quarter's 3.7%. Total deposits fell 1.6%, after declining 1.9% in the second quarter. As a result, the loans-to-deposits ratio jumped to 61.7% from 60.2%.

Banks and thrifts also continued putting their cash to work. Cash and equivalents decreased 3.9% quarter over quarter, and the category is down more than $900 billion since the peak a year ago.

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