Yesterday morning, I participated in conference call on banking conditions with Ron Feldman, executive vice president at the Federal Reserve Bank of Minneapolis. The information presented on the call represented the third quarter as weak and focused on banking conditions from the perspective of earnings. The Fed’s press release is more positive, focusing on reduced problem loans and improved loan growth.
On the call, Feldman described banking conditions in the Minnesota as weak in the third quarter. This was especially true for banks in the Minneapolis-St. Paul area. Banks saw “decreases in profits and declines in loan growth with problem loans remaining flat,” he said.
Feldman also said that interest income, which is banks’ largest revenue source, has been falling for five years. Banks have been unable to get savings on the cost side, he said. “Non-interest expense, which is primarily staff salaries, is banks’ largest expense. It has been flat,” he said. “And, any decrease banks have found in salaries has been offset by expenses in consulting and audit fees.”
This is a different perspective than that given by the Minneapolis Fed’s press release, which focuses on reduced problem loans and improved loan growth. The press release described small improvement for Minnesota bank performance.
At the median Minnesota bank, the level of problem loans as a percent of the resources to cover potential losses decreased by 0.85 percent to 9.94 percent in the third quarter. This ratio is a bit below the national median bank’s 10.22 percent.
The state’s banks continued to improve loan growth in the third quarter, increasing the year-over-year rate of change in outstanding loan balances by 0.83 percent to 2.43 percent.
Yet, Minnesota bank earnings, as measured by the median return on average assets, improved only 0.2 percent to 0.98 percent, the press release said. Return on assets for banks in the Minneapolis-St. Paul area decreased in the third quarter. ROA for the state as a whole was flat.
The performance of Minnesota banks comes down to their ability to earn a return for their stockholders. In that regard, I favor the view that banking conditions were weak in the third quarter, even if banks saw some improvement for problem loans and loan growth.