State of Banks in the US – OCC Annual Report

The Office of Comptroller of currency (OCC) released it’s annual report which provides the official status of the federal banking system to the Congress. For the general public, the report is a useful barometer of the banking industry and additionally provides the priorities and initiative’s of the agency (OCC) and their view of the top risks facing the US banking industry. The report covers all of the 1,068 banks supervised by the OCC ranging from the small community banks to the four largest, most globally active banks which hold 60% of the banking assets in the country.

In their 2022 annual report, the OCC concludes that the US banking industry remains well capitalized with ample liquidity and is well positioned to face the continuing geopolitical & economic uncertainty and market volatility which was also reflected in the views of the Bank CEO’s in the earnings calls last week. The OCC annual report supports this conclusion by noting that the;

  • the Tier 1 leverage ratio of the US banks has remained stable at 8.5% and remains above the pre-pandemic average of 7.5% from 1984 to 2019.
  • while the average liquidity ratio declined for the first time after the pandemic to 21.7% from 24.7% in 2021 it still remains very high compared to an average of 7.6% during the period 1984 to 2019. The healthy status of these two financial metrics are the result of the regulatory changes since the global financial crisis of 2006-2008 and due to emphasis on risk management and prudent capital actions taken by the banks.
  • net charge-off’s on credit loans is 0.26% as of Q3 2022 compared to 0.9% in the pre-pandemic period 1984 to 2016. However this is increasing as noted in the earnings calls of the four largest banks (JP Morgan, Citigroup, Bank of America and Wells Fargo) and for all of them the credit charge-off’s increased in Q4 2022 compared to a year ago.
  • Non-performing loans for the US banks decreased to 0.83% from 1% in 2021 but is still well below the 2.3% average seen in the pre-pandemic period from 1984 to 2019.

The OCC 2022 annual report also acknowledged the slight tremors in the Banks financial health reflecting the headwinds in economy.

  • Average profitability of US banks declined to 1% of average assets from 1.3% in 2021 due to the sharp correction in markets in second half of 2022.
  • The Non-interest expense for banks has continued to increase reflecting increase in labor costs due to the tight labor market and elevated inflation. A Bloomberg article on bank earnings also noted that the total costs at the four largest US banks increased by 5.4% marking a $15 billion increase. 

Looking forward, the 2023 outlook for the US Banks is very much contingent like the economy on the Federal Reserve’s ability to bring inflation under control and the ability of the banks to manage their expenses and funding costs. As such the key risks highlighted in the OCC annual report remain the same as those highlighted by the OCC in their semi-annual risk report released in Dec 2022. The key risks from the OCC’s point of view are;

  • Interest Rate Risk – driven by the elevated inflation and the rising rate environment which while increasing the spread revenues has also resulted in decline in profitability as noted above and increase in funding costs.
  • Operational Risk – this remains elevated reflecting the increasingly uncertain operating environment for the banks and the increased cyber risk driven by state sponsored and individual threat actors targeting the financial system with ransomware and other attacks.
  • Compliance Risk – this has remained as a key risk given the complexity of maintaining sanctions imposed by US and EU on Russia
  • Credit Risk – while net charge-off’s and non-performing loans remain very low as noted above, given the rising rate environment and the economic uncertainty there are certain segments that need closer monitoring. In earnings calls most banks reported increase in reserves for credit card balances and on auto loans. The four largest lenders wrote off $2.29 billion in bad credit-card loans in the last quarter of 2022, a 54% jump from a year earlier.

It will be certainly be an interesting and volatile year with fears of recession looming while rates and inflation stay untamed and a very tight labor market and it is beneficial to factor in as many viewpoints as you can to make sense of it all including the regulatory agencies and with that we are off to the races now with 2023…..

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