U.S. bank industry profits hit record $42.2 billion in second quarter

WASHINGTON (Reuters) - U.S. bank earnings rose to a record-high $42.2 billion during the second quarter as trading income jumped and banks reduced the funds they set aside in case of losses.

A trader looks up at a chart on his computer screen while working on the floor of the New York Stock Exchange shortly after the market opening in New York July 11, 2013. REUTERS/Lucas Jackson

The chairman of the Federal Deposit Insurance Corp, Martin Gruenberg, said his agency’s quarterly report showed continued improvement after the 2007-2009 financial crisis threatened banks’ health.

“Asset quality continues to recover, loan balances are trending up, fewer institutions are unprofitable...and the number of failures is significantly below levels of a year ago,” Gruenberg said on Thursday.

Growth in bank revenue, however, is still sluggish, he said. Regulators also remain concerned that banks, struggling in the current environment of low interest rates, are buying high-yield assets without paying enough attention to the risks.

Bank earnings rose $7.8 billion, or 23 percent, compared to the same quarter in 2012, the FDIC reported.

Compared to a year ago, when the industry was hit with losses on credit derivatives, trading income spiked during the second quarter, which ended in June.

Banks also cut the amount they set aside in case of losses on loans to $8.6 billion, a reduction of $5.6 billion, or 40 percent, the FDIC said.

Net operating revenue during the quarter was $170.6 billion, up $4.9 billion, or 3 percent, from a year earlier, the FDIC said.

Banks still face a number of obstacles. Gruenberg said the industry has nearly exhausted its ability to drive earnings growth by cutting loan-loss provisions, which has been a trend in recent years.

It is also unclear how a slew of regulations called for in the 2010 Dodd-Frank Wall Street reform law will affect bank performance in the near term.

Further, some of the biggest banks are working through ongoing legal challenges and could face steep fees and penalties in the coming months. JPMorgan Chase, in particular, has come under scrutiny for everything from its hiring practices in China to its handling of the “London Whale” fiasco last year.

Reporting by Emily Stephenson; Editing by Karey Van Hall, Andrea Ricci and Leslie Adler