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Cutbacks send bank profits to heights

WASHINGTON – U.S. banks had second-quarter net income of $40.2 billion, the second-highest total on record, as lenders cut expenses and workers to compensate for falling trading revenue, the Federal Deposit Insurance Corp. said.

Loan growth, which returned to levels last seen before the 2008 credit crisis, failed to boost revenue as mortgage servicing and refinancing declined, the FDIC said Thursday in its Quarterly Banking Profile.

The report overall showed continuing recovery by the industry, even as banks cope with pressure resulting from slow economic growth, FDIC Chairman Martin Gruenberg said in a briefing in Washington.

“Net income was up, asset quality improved, loan balances grew at their fastest pace since 2007, and loan growth was broad-based,” Gruenberg said.

Lending was up for the quarter, with loan and lease balances growing 2.3 percent – the fastest growth since 2007.

Trading income fell a fourth straight quarter, dropping 10.1 percent, the FDIC said.

Banks continued bolstering their bottom lines by cutting funds set aside for bad loans, Gruenberg said. Industrywide earnings were boosted as banks set aside the lowest amount of loan-loss reserves in eight years and cut 37,282 employees, according to the report.

“Businesses are more confident about lending, banks have the capacity to lend to them, and they’re aggressively trying to do that,” said James Chessen, the chief economist at the American Bankers Association.

Because banks are “anxious to get money on the street,” Chessen said, they are pressured to give competitive rates – a point of interest-rate risk being monitored by the FDIC, according to Gruenberg.

The number of problem institutions – those viewed as being at heightened risk of failure – continued to drop, to 354 from 411 in the preceding quarter, the FDIC said. Seven lenders failed in the second quarter and increasingly banks are emerging from problem status by recovering rather than closing, Gruenberg said.