Increase in Q1 bank earnings reported
In Q1 2025, the banking sector reported modest gains in net income, despite weaknesses in commercial real estate portfolios. According to the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, the industry's ratio of past-due and nonaccrual loans remains below the pre-pandemic average of 1.94%.
Acting Chairman Travis Hill described Q1 2025 as a stable quarter with no remarkable results. Despite this, banks managed to make significant strides, primarily due to interest income and funding cost factors.
One of the key drivers of the increased net income was an increase in net interest income. For instance, Truist reported a 3.8% increase in taxable-equivalent net interest income compared to Q1 2024, mainly due to balance sheet repositioning done the previous year.
The yield on loan and securities portfolios also played a significant role. Although yields saw slight compression due to rate repricing, the overall higher earning asset yields in banks supporting non-agricultural sectors remained relatively strong. The average yield stood around 5.66%.
The cost of funding also decreased, with the average cost of deposits and short-term borrowings declining due to lower market rates. This helped banks improve net interest margins despite asset yield challenges.
Balance sheet adjustments, such as increased deposits and shifts in debt maturities, also contributed to better funding profiles and liquidity coverage ratios. For example, Truist's average consolidated Liquidity Coverage Ratio was 111%, above the regulatory minimum.
Past-due and nonaccrual loans overall fell one basis point from the prior quarter to 1.59%. However, past-due and nonaccrual loans in multifamily commercial real estate have seen the biggest increase in the past year, up 88 basis points to 1.47%. The greatest weakness in non-owner-occupied commercial real estate loans was reported by banks with assets over $250 billion.
Despite these challenges, the banking sector showed resilience. Non-depository financial institutions reported the largest portfolio increases, with $6.8 billion of the net income coming from the FDIC's 4,022 insured community banks. The industry's annual loan growth rate remains below the pre-pandemic average (3.0% vs. 4.9%).
In summary, the modest net income improvement was driven by strategic balance sheet repositioning, maintaining relatively high yields on earning assets, and benefiting from lower funding costs, which compensated for weaknesses in commercial real estate loan performance. These factors have enabled banks to navigate through the challenges posed by the commercial real estate sector and deliver modest gains in Q1 2025.
The banking industry's resilience was demonstrated in Q1 2025, as strategic balance sheet repositioning and lower funding costs partially offset weaknesses in commercial real estate portfolios, resulting in modest gains despite an increasing trend in past-due and nonaccrual loans in the multifamily commercial real estate sector. Furthermore, the financing sector's net income was boosted by significant strides in interest income and the maintenance of relatively high yields on earning assets in the non-agricultural sectors, with banks' average yield standing around 5.66%.
