Reeling from a series of legal attacks and stymied by declining demand for mortgages, American banks saw their profit margins narrow for the first time in over four years.
A regulatory update from the Federal Deposit Insurance Corporation (FDIC) noted on Tuesday that bank profits declined $1.5 billion from last year, coming to $36 billion in the third quarter of 2013. That’s the first time U.S. bank earnings have fallen since early 2009, when the financial industry was still smarting from the devastating 2008 mortgage crisis.
The drop was driven largely by the deluge of legal fees drenching America’s largest bank by assets. The FDIC wrote that “one large institution reported a $4 billion year-over-year increase in litigation expenses,” a not-so-subtle reference to JPMorgan Chase. In 2013, JPMorgan paid out nearly $19 billion in damages to the Justice Department and private investors over the bad mortgage bonds peddled by two banks it acquired after their collapse in late 2008.
“Had it not been for that, the upward trend in earnings would have continued,” FDIC Chairman Martin Gruenberg said in a news conference, according to the Chicago Tribune.
JPMorgan, which last month posted its first loss in nearly 10 years, has paid much more than the recorded $4 billion in legal fees since the third quarter’s end and likely faces additional legal challenges. That means overall bank revenue may decline even further next quarter.
Adding to industry woes is a decline in mortgage demand caused by rising interest rates on home loans. As the housing market improved, increasing rates made refinancing and new loans less attractive to consumers and led to a 45 percent drop in mortgage sales this time last year. And unlike legal fees, the revenue drop seems likely to persist for years.
But there’s a silver lining for the banks — and everybody else, for that matter. The FDIC reported a massive drop-off in the amount of loans consumers are unable to repay, from over $22 billion in 2012 to just under $12 billion today. That’s a decrease of nearly half, and a sign that people may be finally getting their financial affairs in order following years of uncertainty.
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