Banking in the Ninth

District Banking Conditions

Conditions Corner - April 2018
Banking & Policy Studies

Published May 9, 2018

The health of banks in the Ninth District has nearly returned to levels seen before the financial crisis. This improvement has been driven by increased capital levels and fewer “problem” loans. Unfortunately, the level of bank earnings continues to remain depressed relative to precrisis conditions. In this article, we explore the sources of bank earnings and describe the major changes that have occurred in the composition of bank earnings over the past 15 years.

A variety of metrics can be used to quantify bank earnings, but one useful summary measure is the return on average assets (ROAA). This item is simply the net income earned by the bank over the year divided by the average size of the institution over the same period. The chart below shows the ROAA at the median (middle) bank in the Ninth District since 2000.


Notice that the ROAA for the median bank in the District was generally above 1.2 percent during the first half of the 2000s, and a typical level before the financial crisis (for example, during the 2005–2006 period) was roughly 1.3 percent. This measure of earnings fell sharply during the crisis—​bottoming out at 0.7 percent at the end of 2009—​and has slowly recovered since then. The recovery has slowed in the past two years, and the ROAA at the median bank has been flat over this period at 1.1 percent. This is roughly 20 basis points below the precrisis levels.

Focusing on ROAA is useful since this measure can easily be separated into the key revenue and expense components that comprise the metric. For example, the table below shows the contribution to ROAA from the primary drivers of total revenue and expense at the typical Ninth District bank in 2005 and in 2017.

Contribution to ROAA at the Typical Ninth District Bank
(all items measured as a percentage of average assets)
Revenue 2005 2017 Change
Interest income: loans 4.97% 3.52% -1.5%
Interest income: securities 0.76% 0.40% -0.4%
Interest income: other 0.18% 0.13% 0.1%
Non-interest income 1.01% 0.66% -0.3%
Total revenue 6.91% 4.72% -2.19%

2005 2017 Change
Interest expense 1.73% 0.40% -1.33%
Provision expense 0.23% 0.16% -0.06%
Non-interest expense 3.42% 2.87% -0.55%
Tax and other misc. items 0.24% 0.17% -0.06%
Total expenses 5.61% 3.61% -2.00%

Revenue at the typical District bank, measured as a percentage of average assets, has fallen from 6.9 percent in 2005 to 4.7 percent in 2017. While all of the components of revenue listed above have declined over this period, the largest contributor has been interest income from loans. This result highlights the familiar challenges banks have faced in the current low-interest rate environment. At the same time, banks have benefited on the expense side in this environment, but the reduction in interest expense has not completely offset the revenue loss. Also of note is the lower level of noninterest expense, which includes items such as compensation costs and employee benefits. This suggests that banks have become more efficient operators over the period.