Although bank profits are up, uncertainties temper outlook
Washington • U.S. banks are enjoying their best profits in six years and are lending a bit more freely. The gradual improvement suggests that the industry will sustain its healing from the worst financial crisis in decades and help strengthen the economy.
The industry earned $37.6 billion from July through September a 6.6 percent increase from its earnings in same quarter last year.
For the first time since 2009, the stronger earnings were due mainly to higher revenue rather than to less money set aside by the banks to cover losses, data issued by the Federal Deposit Insurance Corp. showed Tuesday. And loans to consumers rose nearly 1 percent from the July-September period of 2011.
"We are seeing the classic recovery from a recession," said Bert Ely, a banking industry consultant based in Alexandria, Va. "All of the arrows are pointing in the right direction."
Some of the largest banks are cautioning, though, that their earnings are up mostly because they've sold less-profitable businesses, shed bad loans and trimmed jobs not because of a more vibrant economy.
Some banks are testing higher fees on consumer loans and services to offset new rules mandated after the crisis that have crimped revenue.
Consumer lending grew in most categories in the third quarter. That shows banks are becoming less cautious, which could help the economy. More lending leads to more consumer spending, which drives roughly 70 percent of economic activity.
The banks' mortgage loans increased 0.8 percent from the previous quarter. Auto loans jumped 2.4 percent.
FDIC Chairman Martin Gruenberg acknowledged that the increase in consumer lending was "relatively modest."
Ely noted that many businesses and consumers are still reluctant to borrow, and banks are cautious about lending to them. That's creating a slow transition for banks from merely stemming losses to boosting profits, he said.
The biggest banks say that customers have held off on borrowing in part because of slower global growth and worries about the "fiscal cliff." That's the name for automatic tax increases and spending cuts that will kick in next month unless President Barack Obama and congressional lawmakers reach a deal by then to avert them.
Since the Great Recession ended 3Â½ years ago, the economy has been growing at a subpar annual rate of roughly 2 percent. Most economists say it needs to grow twice as fast to rapidly lower unemployment, now at 7.9 percent.
In an interview with The Associated Press this week, Wells Fargo & Co. CEO John Stumpf said he expects the economy to remain tepid until customers and businesses better understand Washington's plans for tax policy, health care and other issues.
"I don't see the impetus to all of a sudden go from a 2 percent growth to a 5 percent growth," Stumpf said. "We don't have enough growth initiatives in place today to have a more aggressive and sustainable long-term recovery, and there's still too much uncertainty."
The Federal Reserve's policies have helped banks borrow cheaply for the past four years. The Fed has kept short-term interest rates near zero to try to spur the economy. And the Fed's bond purchases have led to lower long-term interest rates, which have helped drive a modest housing recovery and boost mortgage lending.
But banks complain that low interest rates have also reduced the money they can make on loans.
Mortgage lending itself has become a mixed bag for banks. The second-largest U.S. bank, Bank of America Corp., has said the new mortgages it made in the third quarter jumped 18 percent from a year earlier to $21 billion. But its mortgage division still lost money as it worked through problem mortgages issued before the financial crisis.
Mortgages still drive revenue for the banking industry. But banks are still paying a price for the risky mortgage lending of the past decade in the form of lawsuits, foreclosures and regulatory restrictions.
And banks are struggling to navigate a landscape in which many of their old revenue streams, including certain fees on debit-card transactions or credit cards marketed to college students, have been clipped.
To make up for the loss of revenue in other areas, they have been trying to collect more revenue from fees. Last year, some banks tried to charge customers for using debit cards. That unleashed a backlash among consumers and helped fuel anti-Wall Street protests. The banks ultimately dropped these fees. But others have remained.
At the same time, some in Congress are calling for separating commercial and investment banking, which essentially would spur the dismantling of most of the biggest banks.
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