Overdue office loans are new pain point for banks in FDIC report

Bank profits fell in the third quarter despite the booming economy, according to data from a top U.S. regulator, which flagged risks that include inflation, rising interest rates, geopolitics and a shaky office real estate market.

The Federal Deposit Insurance Corp. said Wednesday in its Quarterly Banking Profile that the 4,614 banks it supervises are financially strong as a group, and profits are still historically high, even with the period’s 3.4% decrease from the prior quarter to $68.4 billion. The agency’s watch list of the weakest lenders rose by one to 44.  

“The banking industry continued to show resilience,” Martin Gruenberg, the head of the agency, said in a statement. Still, he added that the industry faces significant downside risks that could affect credit quality, profits and liquidity. Regulators and analysts have warned about potential deterioration in commercial real estate loans, and Gruenberg said those concerns are beginning to materialize. 

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Banks have largely moved past the turmoil of last March that led to the collapse of four regional lenders, and the FDIC said asset quality metrics remain favorable. But the economy’s brisk 5.2% growth in the third quarter didn’t translate into a similar burst for profits, especially at community banks, where net income dropped 4.8%.

Gruenberg singled out office property for attention, with overdue loans for commercial real estate buildings that aren’t owner-occupied jumping 36% to the highest level since 2014. 

Unrealized losses on securities, the focus of intense concern during the March crunch, increased to $76.5 billion from $12.8 billion in the prior quarter and 4.9% from the prior year, leaving the sum back near its recent highs. The category mostly reflects bonds bought when interest rates were closer to zero, and whose value has since plunged. This could be a problem if banks had to sell those bonds to cover sudden, massive withdrawals, but lenders have said they expect they can hold those securities until they mature.

The agency’s bedrock deposit insurance fund increased to $119.3 billion in the third quarter, a $2.4 billion lift that stemmed from increased assessments paid by banks.