Report on the condition of the U.S. banking industry: fourth quarter, 2003

Federal Reserve Bulletin, Spring, 2004

The assets of reporting bank holding companies expanded roughly $130 billion, or 1.6 percent, in the fourth quarter. Securities and money market assets accounted for most of the increase, rising about $120 billion after having declined in the third quarter. Bank holding companies added to their holdings of mortgage pass-through securities and direct obligations of U.S. government agencies. Loans grew 1.4 percent, a more modest pace than in recent periods, tempered by continuing declines in commercial and industrial lending and some shrinkage in the stock of residential mortgage loans held for sale to securitization vehicles (related to slower mortgage originations). Deposits and borrowings increased 2.3 percent and 2.4 percent, respectively, in part compensating for a decline in other liabilities.

Undrawn commitments to lend rose more than $200 billion, or 5.4 percent, in the quarter and reached the $4.0 trillion level for the first time. Most of the increase was in the credit card category, due in large part to the acquisition during the quarter of large credit card portfolios from non-bank-holding-company firms.

Asset quality showed further signs of improvement. Nonperforming assets continued to decline--both in absolute terms and as a share of loans--as they have since late 2002. The net charge-off ratio increased slightly in the fourth quarter, to 0.83 percent of average loans, but remained well below year-earlier levels.

Net income rose overall to $28.3 billion for the fourth quarter, bringing full-year profits to $100 billion for the first time. Net interest income accounted for much of the quarterly improvement and was fueled by healthy growth in securities holdings and a rebound in yields on mortgage-backed securities--the latter related to slower prepayments. Net interest margins inched up to 3.46 percent of period-average earning assets, representing at the least a pause in the steady contraction that margins have sustained since late 2001. Non-interest income recovered 4.5 percent after a small third-quarter decline, supported by higher fees from asset management, mortgage servicing, and investment banking. Non-interest expense, which often jumps in the final quarter of a year, increased only modestly in this case and continued to represent roughly 62 percent of pretax revenue.

All of the quarterly gain in aggregate earnings occurred at the "fifty large" bank holding companies. For "all other" bank holding companies, aggregate earnings declined slightly in the fourth quarter as they had in the third quarter. Non-interest costs at these smaller bank holding companies expanded nearly 6 percent in the fourth quarter, while non-interest income slipped slightly. The net charge-off ratio rose significantly at smaller institutions in the fourth quarter, although at 0.49 percent of average loans it was still only half the level of the "fifty large" bank holding companies.