(Corrects number of 2011 bank failures, in paragraph 18)
By Dave Clarke
WASHINGTON (Reuters) - The banking industry continues to recover from the 2007-2009 financial crisis but lending will need to pick up if progress is to continue, Federal Deposit Insurance Corp Chairman Sheila Bair said on Wednesday.
Industry profits were up considerably from a year ago standing at $21.7 billion in the fourth quarter of 2010, which compares to a net loss of $1.8 billion a year ago, according to the quarterly banking report released by the agency.
Most of the increase was due to banks putting aside less to guard against loan losses.
Banks put aside $31.6 billion in the fourth quarter for losses, about 50 percent less than a year ago.
Bair said that in order for banks to fully move beyond the financial crisis they will need to start lending more.
"Cleaning up balance sheets, however, is only a first step," Bair said. "Now, we are looking to the industry to take the next step, and begin to build their loan portfolios."
Loan balances continue to decline but at a slower pace than in recent quarters in a sign lending may be ready to pick up.
These balances declined by $13.6 billion in the fourth quarter compared to a $133.2 billion drop a year ago.
Credit card loans increased in the fourth quarter by $18.1 billion, or 2.6 percent. This increase was largely due to the holiday shopping season, but Bair said it was a positive sign for the economy that consumers are willing to spend.
Banks have argued that one reason they are not lending more is their is little demand due to the struggling economy.
While agreeing demand is an issue, Bair said banks should be doing more. "Banks need to get back to the basics of making loans," she said.
Chip Hendon, a senior portfolio manager at Huntington Asset Management in Cincinnati, said banks that jump into lending aggressively now may find themselves well rewarded.
"I think the banks that are willing to step up and take on a little more risk right now may fair better in the long term," Hendon said. "Things are always cyclical -- people always get too greedy on one side and too fearful on the other. The risks to the market were very real, but overdone in the years past. We seem to be coming out of that."
INDUSTRY IMPROVEMENTS
Bair said that the outlook for the industry overall is improving even for smaller banks who have been burdened by soured commercial real estate loans.
In another good sign, the amount of bad loans on banks' books, those 90 days or more past due, declined for the third consecutive quarter.
Nevertheless, the number of banks on the FDIC's problem list rose slightly to 884 in the fourth quarter, an increase of 24 from the previous quarter.
In the fourth quarter of 2009, one hundred fifty institutions were added to the list.
So far in 2011, 22 banks with $9.3 billion in assets have failed. For all of 2010, 157 banks with total assets of $92 billion failed after 140 banks failed in 2009 with total assets of $169.7 billion.
Only a small percentage of the banks on the problem list end up failing. The FDIC does not disclose the names of these institutions that are flagged for low capital levels, poorly performing assets or other troubles.
(Reporting by Dave Clarke in Washington and Clare Baldwin in New York; Editing by Andrea Ricci and Tim Dobbyn)
