UPDATE 2-U.S. bank saw record deposit declines in Q1 as profits remained steady: FDIC

(Adds context in paragraph 2, stock reaction in paragraph 4, new Gruenberg quote in paragraph 5)

By Pete Schroeder

WASHINGTON, May 31 (Reuters) - U.S. banks saw total deposits decline by a record 2.5% in the first quarter of 2023, and industry-wide profits were relatively flat after taking into account the effects of two large bank failures, the Federal Deposit Insurance Corporation said Wednesday.

The FDIC said the $472 billion in deposit outflows in the first quarter was the largest it had recorded since it began collecting such data in 1984. The decline was primarily from uninsured funds, as insured deposits actually rose $255.1 billion, or 2.5%, amid the failures of Silicon Valley Bank and Signature Bank. The decline in deposits was offset by increased wholesale funding, which rose 14.4% in the first quarter.

Wednesday's report marks the most comprehensive view of the banking industry's health since those two failures helped set off wider turmoil across the sector, including the May seizure of First Republic Bank.

Following the report's release, the S&P 500 bank index was down 2.6% having hit its lowest point in about two weeks and eyeing its biggest one-day percentage drop since early May. The biggest decliners included Comerica, Keycorp and Citizens Financial.

FDIC Chairman Martin Gruenberg said that while the industry remains "resilient," the fuller impact of the turmoil may not be seen until the agency reports its second quarter results. He also noted the sector continues to face other risks stemming from inflation, rising rates, and economic pressure, particularly in areas like commercial real estate.

The FDIC said bank profits were technically up 16.9% to $79.8 billion in the first quarter of the year, but profit levels were effectively flat after taking into consideration the accounting impact of the acquisition of those two failed firms.

The results showed banks shrinking the amount of unrealized losses on their books and maintaining strong capital ratios. But it also found deposit outflows for the fourth straight quarter and accelerating, and the FDIC placed four new firms on its "problem bank list," which now includes 43 firms with a total of $58 billion in assets.

Gruenberg noted that even flat profit levels are still high by historical standards, and was boosted by record trading revenue by large banks and strong growth in non-interest income. (Reporting by Pete Schroeder and Sinead Carew, Editing by Nick Zieminski)