Banks this earnings season are walking a fine line between restoring confidence and managing expectations in an economy that hasn't made either task easy.
Despite a widespread deceleration in the pace credit deterioration, industry executives have stopped short of declaring the start of a positive trend.
JPMorgan Chase & Co. added less to its credit reserves than in previous quarters, but it would not promise that the reserves were done growing. Citigroup Inc. posted its second straight decline in loan losses, but predicted credit costs would tick back up in the current quarter. U.S. Bancorp shrunk its loan-loss provision for the first time in 15 quarters, but it warned Wednesday that loan losses have not peaked.
Wells Fargo & Co. executives were slightly more upbeat, saying loan losses appear to have crested earlier than the company expected. And Bank of America Corp. reported sizable reductions in provisions and chargeoffs. (See related stories on Wells, B of A.)
But the overall tone is one of restraint, leaving it up to investors to reconcile the more encouraging bits of data they are seeing with the tepid guidance they are hearing.
"Better to speak very conservatively and then surprise positively, rather than to talk optimistically now only to have something exogenous happen that causes them to underperform," said Philip Orlando, chief equity market strategist at Federated Investors.
It is a sharp contrast from last March, when Citi Chief Executive Vikram Pandit helped spark a rally in stocks just by announcing — in what looked to be a very bold move at the time — that his company was profitable through the first two months of 2009.
"You were trying to stop the bleeding then," Orlando said. "You had companies and CEOs like Vikram who were latching onto whatever positive data points they had, and that was probably the appropriate thing to do then."
Pandit was predictably cheery this week in discussing Citi's brand equity and long-term prospects, but he kept optimism about the company's shrinking loan losses in check, warning analysts that longer-term credit cost trends would depend on the performance of its U.S. mortgage portfolio.
Davis, too, maintained a cautious stance.
He acknowledged that U.S. Bancorp's sequential-quarter increase in nonperforming assets, 5% in the fourth quarter versus 12% in the third, was "another sign that credit quality is deteriorating at a slower pace." But that was as effusive as he got when discussing the subject on a conference call with analysts.
U.S. Bancorp's provision for credit losses dropped 4.7% from the third quarter, to $1.39 billion in the fourth. But the Minneapolis company still made incremental additions, so the provision exceeded net chargeoffs by $278 million, versus $415 million in the third quarter.
"One quarter, in this environment, isn't enough to convince all of us that we're done; a couple of quarters, yes," Davis said. "We probably will continue to add to [the] provision a little longer until we're sure."
Joe Price, B of A's chief financial officer, echoed the sentiment, albeit with a sunnier spin.
"Obviously one quarter doesn't make a trend," Price said, "but we feel much better about the loss loans this quarter and that they signal stabilization, if not an improvement trend."
B of A reported a 13.6% reduction in the provision and a 12.5% drop in net chargeoffs, while NPAs rose 5.6% from the third quarter.
"It feels to us like we're moving from stability to an actual improvement, but obviously given the weak economy, we remain cautious," Price said.
Many large banks already have seen heartening developments on the delinquency front, not a perfect proxy for future loan losses but nonetheless another place investors can point to as a source of comfort.
At U.S. Bancorp, for example, 30- to 89-day delinquencies fell in the fourth quarter versus the third in residential mortgages, home equity, credit cards, retail leasing and commercial leases. But early delinquencies trended higher for commercial loans, construction loans and commercial real estate mortgages, while net chargeoffs increased in nearly every category.
Investors proved willing to overlook the more troubling aspects of the portfolios at banks that reported results on Wednesday. On a lousy day for the broader stock market, with the Standard & Poor's 500 index off by about 1% and the Dow Jones industrial average down more than 122 points, the KBW Bank Index gained 1.4%, to 47.82. But bank stocks generally have been following the direction of the broader market, which rallied last year ahead of an expected recovery in corporate earnings.
"We are in a period towards the end of most global recessions when share prices rise even though profits are still falling," Robert Buckland, Citi's chief global equity strategist, said Wednesday at an economic outlook forum hosted by Dow Jones Indexes. "This twilight zone ends as the earnings recovery begins, and this moment looks imminent."
It might even be here already, even if bank CEOs aren't saying so.