After reaching record earnings in the second quarter of 2015, the U.S. banking industry can expect global economic factors, recent stock market volatility, and interest rates to be deciding factors in the upcoming third quarter report and beyond.
U.S. banking institutions that are insured by the Federal Deposit Insurance Corp. (FDIC) earned an aggregate net income of $43.0 billion in the second quarter of 2015, up $2.9 billion from a year ago, the FDIC announced in their Quarterly Banking Profile  last week .
The $43.0 billion second quarter profits, the highest quarterly income on record, was mostly driven by a $3.6 billion rise in net operating revenue, the FDIC said.
"The industry experienced a continuation of positive trends observed over recent quarters," said. Martin J. Gruenberg, Federal Deposit Insurance Corp., Chairman."However, the banking industry continues to face challenges. Revenue growth has lagged behind asset growth, as exceptionally low interest rates put downward pressure on net interest margins. On balance, the industry—and community banks in particular—experienced another positive quarter."
In an analysis of second quarter bank earnings , the Kroll Bond Rating Agency  (KBRA) determined that credit metrics are improving for the U.S. banking industry, but revenue and earnings are still an issue, especially for larger banks.
Regional and community banks reported better performance in the second quarter of 2015 compared to bigger institutions, which has usually been the case for previous quarters.
The FDIC's net operating revenue rose 2.1 percent from a year ago to $172.9 billion as loan growth raised revenues for most banks in the second quarter. Net interest increased by 2.3 percent compared to the second quarter of 2014, while noninterest income was 1.9 percent higher. Servicing income increased 63.9 percent and trading income fell 14.1 percent.
The report also noted that community bank earnings increased 12 percent from a year earlier to $5.3 billion. Net operating revenue also rose 8.0 percent from a year ago to $22.3 billion at community banks.
KBRA believes that third quarter earnings will be affected by global economic conditions, stock market volatility, and the Federal Reserve's interest rate decision.
"Looking forward to the end of the third quarter, the market turmoil caused by China’s faltering economy may impact non-interest income at many large banks that are active as advisers in the primary market for securities," the agency said. New issue activity in the bond market dried up for several weeks in August, depriving dealers of fee income."
KBRA added, "Market volatility is likely to continue through the rest of 2015 and beyond as markets get comfortable with an eventual change in policy by the FOMC. However, the key question for most investors remains whether short-term interest rates are going to move higher in the U.S."
The report also noted that four things must occur for banks to maintain the growth levels seen the second quarter:
- Expenses must remain under control and the downward trend in litigation and other regulatory costs must continue.
- It would be beneficial for the industry to see another $4 billion handle on servicing income for Q3, but this particular income line for banks tends to be very volatile.
- Releasing additional reserves back to income also would be advantageous, but this is unlikely.
- It would be significant if the rebound in mortgage origination volumes continued in the second half of 2015, but KBRA expects to see volumes start to soften after a torrid first half of the year.
"All in all, KBRA expects trends in U.S. banking industry revenue, earnings, and credit costs to continue to track the past few quarters, but with less help from operating expense reductions and reserve releases," KBRA concluded. "Higher volatility and growing investor concerns about the health of China and the global economy will make managing institutions with market exposure especially challenging."
Forbes also issued a bank profit outlook report for 2016 , noting that earnings among these institutions could rise 50 percent. Author of the report, Bill Conerly said that bank can increase their earning next year by focusing on loan growth, monitoring deposit levels, and working on employee retention.
"The year 2016 should be a good one for banks in the United States, with the best managed institutions doing especially well," Conerly said.
Click here  to view Kroll Bond Rating Agency's Banking Industry: Q2 2015 Review & Outlook.
Click here to read more of Forbes Bank Profit Outlook 2016.