Dive Brief:

• Bank profits fell 6.5% to $59.7 billion, in the first quarter of 2022, compared with the previous three-month span, the Federal Deposit Insurance Corp. (FDIC) reported Tuesday in its quarterly banking profile. 
• The decline in net income was fueled by large banks adding to their loan-loss reserves in the face of mounting economic uncertainty, as inflation soared, interest rates increased and Russia invaded Ukraine. 
• Bank profits dropped 22.2%, or $17 billion, between the first quarter of 2021 and 2022, the regulator found. 

Dive Insight:

In the early days of the COVID-19 pandemic, banks cached billions of dollars in loan-loss reserves, fearing large-scale defaults that never materialized. Banks freed those reserves in early 2021, netting record profits in the process.

Banks diminished loan-loss provisions by $14.5 billion during the first quarter of 2021, the FDIC reported. Now, banks are reversing course, once again building up their reserves. The banking sector increased loan-loss provisions by $5.2 billion during the first quarter of 2022, a 135.8% increase from the comparable 2021 quarter.

The trend was largely driven by big banks with greater than $10 billion in assets, the FDIC found. Such firms comprised almost the entire aggregate increase in loan-loss provisions, as only 25.2% of banks reported higher provisions for loan-loss reserves in Q1 2022 than Q1 2021. 

“Banks increased loan-loss provisions in the first quarter due to heightened uncertainty, which lowered industry net income,” the American Bankers Association (ABA) said in a statement. “Nonetheless, banks are well capitalized and the industry remains well positioned to handle the challenges caused by the Fed’s efforts to combat inflation. Banks added jobs in the quarter, with industry employment rising by 19,000.”

In the banking industry writ large, profits dropped 22.2% between the first quarter of 2021 and the most recent quarter, with 62.8% of firms reporting a decline in net income from Q1 2021.

Total loan and lease balances increased by 1% (or $109.9 billion) from Q4 2021, driven by growth in commercial and industrial loans. Loan and lease balances increased 4.9% (or $531.8 billion) from Q1 2021. 

FDIC Acting Chairman Martin Gruenberg said capital and liquidity levels "remain strong." 

"In addition, loan growth and credit quality metrics remain generally favorable,” he said. “Looking forward, inflationary pressures, rising interest rates and continued pandemic and geopolitical uncertainty will likely be headwinds for bank profitability, credit quality, and loan growth."