Second Quarter 2018: Bank Profits Buoyed Capital but Deposit Growth Slowed

August 28, 2018

First Glance 12L provides a quarterly look at banking and economic conditions within the 12th District. Bank profits continued to strengthen year-over-year, owing to wider net interest margins and lower income tax rates. Although after-tax profit ratios rivaled pre-crisis levels, pre-tax ratios remained well short. Annual and quarterly loan growth edged higher compared with 1Q18, partly at the expense of more liquid instruments. As a result, average asset growth decelerated quarter-over-quarter, constrained by slower core deposit gathering. Despite increased dividend and repurchase activity, stronger earnings and slower balance sheet growth lifted regulatory capital ratios. Commercial real estate (CRE) continued to drive loan portfolio increases, but in many cases, credits have been supported by property values that have increased more rapidly than net operating income. CRE capitalization rates showed little response to rising interest rates through mid-2018 as debt and equity financing remained readily available. On the residential side, rising interest rates caused some cooling of annual home price appreciation and tempered refi-related mortgage originations. For most District markets, home values still represented above-average multiples of incomes and rents, and average affordability dipped below 2008 levels in several states. The report briefly discusses international trade and several other “Hot Topics.”