BAS Presentations - March 2023

Banking Industry x Banks reported higher net income in 2021 primarily due to negative provision expense. x NIM decreased, reflecting the low interest rate environment. x Loan growth improved from 2020 levels, reflecting improved economic sentiment. x Asset quality metrics continued to improve. Banks reported higher earnings in 2021 primarily due to negative provision expense. Industry net income for 2021 rose 89.7 percent ($132.0 billion) from 2020 levels to $279.1 billion (Chart 8). The banking industry reported aggregate negative provision expense of $31.0 billion for 2021 as banks reassessed the risk of the pandemic and economic uncertainty on their loan portfolios. Negative provision expense was significantly less than the positive $132.3 billion in provision expense reported in 2020. Similar to the improved earnings, the return on average assets (ROA) ratio for the banking industry improved to 1.23 percent in 2021 from 0.72 percent in 2020.

Chart 8

Community bank net income increased 29.3 percent in 2021 to $32.7 billion. The improvement was due to rising net interest income in combination with lower provision expense (Chart 9). Stronger loan growth and recognition of deferred PPP loan fees contributed to the rise in net interest income. Provision expense for community banks, while lower than the 2020 level, was $1.1 billion for 2021. The average ROA ratio for community banks also increased, from 1.09 percent in 2020 to 1.25 percent in 2021. Despite the negative provision expense for the industry in 2021, the allowance for expected credit losses (ACL) remained higher than the pre-pandemic level at year-end 2019. The ACL as a percentage of total loans and leases was 1.58 percent, well above the 1.18 percent at year-end 2019.

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