By Dave Clarke
WASHINGTON (Reuters) - The banking industry enjoyed its highest earnings since the first half of 2007 in the first quarter, but lending slowed, reversing what had been an encouraging trend in loan growth.
The Federal Deposit Insurance Corp's quarterly report, released on Thursday, showed the industry earned $35.3 billion in the first quarter, up $6.6 billion, or 22.9 percent, from a year earlier. The increase was largely due to banks setting aside less money to guard against loan losses.
Banks pulled back on lending during the first quarter as loan balances dropped for the first time in four quarters.
FDIC Acting Chairman Martin Gruenberg cautioned that it is too soon to draw conclusions about the lending drop after only one quarter but said "the overall decline in loan balances is disappointing after we saw three quarters of growth last year."
Overall loan balances declined by $56.3 billion, or 0.8 percent, during the first quarter.
Until lending picks up considerably it will be difficult for the U.S. economy to gain steam and for banks to continue recording the profits they have shown in recent quarters.
Gruenberg said one factor in the drop in loan balances was seasonal, noting that credit card lending went down following the end-of-year holidays.
The data also showed, however, that housing remains a persistent problem.
Residential real estate loan balances fell by $19.2 billion, or 1 percent, during the quarter.
A bright spot continues to be lending to businesses, with loan balances in this category growing $27.3 billion, or 2 percent, during the first quarter.
"Total lending volumes continue to suffer solely because of weakness in the housing sector," said Jim Chessen, chief economist at the American Bankers Association. "The overall lending volume for banks will continue to grow at a gradual pace until the housing market improves."
Gruenberg warned that the European financial crisis is a major threat to the U.S. banking industry going forward.
While U.S. banks are not overly exposed to individual countries or European institutions, any hits to economic growth in Europe will likely mean trouble in the United States, he said.
"What we should worry most about are both the potential macroeconomic effects in Europe and if there is significant financial difficulties in Europe the potential contagion effects that could impact U.S. institutions," he said.
REVENUES UP, BUT FOR HOW LONG
The industry is in good shape overall with banks accumulating more capital and the amount of bad loans on their books dropping, the FDIC said.
Revenues were also up in the first quarter.
Banks' net operating revenues were higher than a year earlier by $5 billion, or 3.1 percent. The FDIC said this was mostly due to non-interest income, such as loan sales.
Gruenberg said it "remains to be seen whether banks can continue to sustain revenue growth going forward."
The number of struggling banks continues to decline.
In the first quarter, 16 banks were closed, the lowest level since the fourth quarter of 2008. The FDIC report covers 7,307 institutions.
The number of banks on the agency's "problem list" fell from 813 in the fourth quarter to 772 in the first quarter. The FDIC does not release the names of the banks on the list.
(Reporting By Dave Clarke; Editing by Gerald E. McCormick and Tim Dobbyn)