OCC: Bank system remains strong as challenges persist

The federal banking system remains strong even as uncertainty remains over consumer sentiment, geopolitical risks and higher interest rates, according to a semiannual risk report from the Office of the Comptroller of the Currency. .Community bank return on equity declined to 10.4 percent from 10.7 percent in 2023, which was still strong compared to historical averages. Net interest income slowed last year due to higher funding costs and lower loan growth, according to the report. Net interest income increased 2.7 percent for banks with fewer than $10 billion in assets and dropped 0.3 percent for larger institutions. Net interest margins improved for OCC-supervised banks in the second half of last year as the effective federal funds rate cuts allowed banks to reduce funding costs, according to the report. Real estate loans sparked a 4 percent rise in loan balances at banks with fewer than $10 billion in assets, according to the report. Residential real estate, nonfarm nonresidential and multifamily loans make up more than 60 percent of community bank lending. Capital ratios and liquidity remain relatively high, according to the OCC. Earnings outlooks for banks this year will depend on how they navigate an unclear economic climate and the progression of interest rates, according to the June 30 report.Operational risks remained relatively high as banks continued to respond to cyber risks. Fraud schemes banks faced surrounded checks, wire transfers, peer-to-peer payments and insiders. Such threats highlight the need for operational resilience and strong third-party risk management — especially as more banks partner with fintechs, according to the report. “Failure to upgrade systems and digitize may result in loss of market share to competitors offering faster and cheaper payment alternatives,” according to the report. “Criminals continue to exploit traditional payment methods.” Risk remains for some CRE properties, according to the report. “Refinance risk remains high for loans underwritten during a period of lower interest rates,” according to the OCC. “Retail credit risk remains stable despite economic uncertainty. Most consumer borrower segments continue to withstand elevated prices, interest rates and growing debt levels, supported in part by growth in wages exceeding aggregate inflation since 2019.”