Report on the condition of the U.S. banking industry: first quarter, 2004

Federal Reserve Bulletin, Summer, 2004

Assets at reporting bank holding companies rose $325 billion (or 3.7 percent) in the first quarter, primarily because the fifty large bank holding companies were active acquirers of investment securities during the period. (1) Aggregate securities and money market assets increased $260 billion, with nearly all of that increase occurring at the fifty large bank holding companies. Growth in investment securities at large institutions was associated with broader efforts, including derivatives transactions, intended to adjust interest rate sensitivity. The notional value of derivatives outstanding rose $6.3 trillion, or nearly 9 percent.

Loans grew only $75 billion, influenced by growth in holdings of mortgage loans but also by continuing softness in the commercial and industrial loan category. Unused commitments to lend grew more significantly ($100 billion, or 2.5 percent), with most of the growth occurring in credit cards and home equity lines of credit at large institutions.

Deposits grew $140 billion, a healthy 3 percent, but not sufficient to fund the quarter's asset growth. Accordingly, nondeposit borrowings rose $125 billion, or nearly 5 percent. Robust asset growth also contributed to a small decline in the total risk-based and leverage capital ratios, which nonetheless remain well above regulatory minimum standards.

Net income of reporting bank holding companies reached nearly $30 billion for the quarter, an increase of $1.6 billion from the fourth quarter of 2003. Stronger net interest income (fueled by asset growth) and lower provisions for loan losses provided much of the improvement, along with $2.0 billion in gains associated with the sale of investment securities. Nonperforming assets and net charge-offs continued their sustained decline--falling to roughly 1 per-cent of loans and 0.63 percent of average loans, respectively--allowing for the lower provisions. Non-interest income rose only modestly for the quarter as revenues generated by the origination and sale of new residential mortgage loans fell, influenced by earlier increases in mortgage interest rates and the corresponding slowdown in residential mortgage refinancings. However, market-sensitive revenues and fees from servicing existing mortgages provided some support.

More than one-third of the quarterly increase in net income was provided by other bank holding companies, as shown in table 3. Profits at these other (smaller) bank holding companies improved $0.6 billion, or 14 percent, in the first quarter after two quarters of declining earnings. Much of this improvement was attributable to dramatically lower provisions for loan losses--down nearly 30 percent, which in turn reflected seasonal influences more than it reflected the credit cycle. Provisions for loan losses declined a similar proportion in the first quarter of 2003.

(1.) The panel of fifty large bank holding companies has been updated on the basis of year-end 2003 data. Data contained in this report do not reflect administrative changes in the organizational structure of HSBC and its U.S. affiliates made during the first quarter of 2004. Therefore, these data do not reflect the ownership of House-hold International (total assets of about $140 billion) by HSBC's U.S. affiliates. These administrative changes will be fully incorporated into subsequent reports.