WASHINGTON Huge legal costs at JPMorgan Chase & Co (JPM.N) and slowing demand for mortgages as interest rates rose caused the first decline in bank profits since 2009, a third-quarter regulatory update said on Tuesday.
Higher interest rates lowered the value of fixed income assets and sapped demand for mortgage refinancing, the Federal Deposit Insurance Corporation said.
Net interest margins benefited from the rise, but they were still lower than a year ago.
A $4 billion increase in litigation expenses at one institution - not named by the FDIC but identified as JPMorgan by a source - was the main reason why net income at U.S. banks declined 3.9 percent year-on-year.
"Had it not been for that, the upward trend in earnings would have continued," FDIC Chairman Martin Gruenberg said at a news conference.
JPMorgan declined to comment.
Last week, the bank agreed to pay $13 billion to settle charges it misrepresented the quality of mortgages it sold before the crisis. It had previously recorded $9.3 billion in legal expenses in the third quarter to build reserves in anticipation of the deal and other payouts.
The FDIC's numbers are lower than those of JPMorgan because the agency's tally only looks at the bank's subsidiaries that have deposit insurance, and not the entire corporation.
Total net profit at FDIC-insured banks was $36 billion in the quarter, $1.5 billion less than a year ago, constituting the first year-on-year decline in profits since the second quarter of 2009, when the industry started recovering from the credit crisis of 2008.
It was also off from a downwardly revised $38.1 billion total industry profit in the prior quarter.
"The near disappearance of mortgage refinancing due to rising interest rates has hindered bank revenue," James Chessen, chief economist at the American Bankers Association, said in a statement.
Lower loan-loss provisions were a significant positive contribution as banks set aside $5.8 billion, the smallest reported by the industry since the third quarter of 1999, the FDIC said.
Long-term positive trends also continued, as fewer institutions reported quarterly losses, credit quality continued to improve, lending grew at a modest pace, and fewer banks failed.
Equity capital increased by $13.9 billion, or almost 1 percent, after declining in the previous quarter, with retained earnings adding $13.1 billion to the rise. Dividends rose strongly, at a rate of 11.9 percent.
Six banks failed in the quarter, while 43 were absorbed in mergers and one new institution was added. The total number of banks whose deposits are guaranteed by the FDIC stands at 6,891, the agency said.
(Reporting by Douwe Miedema; Editing by Jeffrey Benkoe and Steve Orlofsky)