Academic journal article ABA Banking Journal

What Does the First Half Tell Us about the Second?

Academic journal article ABA Banking Journal

What Does the First Half Tell Us about the Second?

Article excerpt

With the dust settled on second quarter results for banks, the story of 2005 is halfway written. What have the most pronounced trends been thus far? And which trends can be expected to continue in the third quarter and beyond?

The accompanying table has been created by pulling the quarterly financial results for all major-exchange public banks and thrifts from the SNL DataSource. The results were then size weighted to allow for an accurate view of performance over the last 12 months.

Several banking trends appear substantiated by the data. Margins have been squeezed as a result of the flattening yield curve, and show steady compression throughout the past four quarters.

ROAA and ROAE results parallel that trend, and show that the shrinking margins have trickled down to the bottom lines of many banks. The results further down the table seem to suggest that those losses to income could be even worse if the aggregate margin continues to compress; e.g. reserve levels have fallen relative to loans, which means banks are likely tapping provisions to add a few extra cents to the bottom line.

This leads into the next trend: asset quality. Another pristine quarter has enabled banks to bleed reserves, as noted, without too much argument. Nonperforming loans to total loans has fallen steadily on weighted aggregate. So long as credit quality stays at this level, mitigating net interest income deficiencies with provision cash will probably continue. But with charge-offs at a historical low, how long will it be until things regress to the average? …

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