Releases of loan-loss reserves continued to fuel bank earnings in the third quarter, and there may be plenty of gas left in that tank.

As in the second quarter, reductions in loss cushions — or the amount by which allowances are not replenished when quarterly chargeoffs exceed provisions — accounted for large fractions of earnings per share: about two-thirds at Citigroup Inc., assuming a tax rate of 35%, and about one-third at JPMorgan Chase & Co.

Among six of the largest banking companies, total reserve releases grew 10% from the previous quarter, to $6.3 billion before taxes. But large and mostly growing gaps between chargeoffs and cumulative reserves suggest that billions more could flow through income statements in coming quarters (see charts below).

Jamie Dimon, JPMorgan Chase's chief executive, asserted skepticism during his company's earnings call about swings in reserve positions as credit deteriorates and recovers, as he did the previous quarter. "It's a silly post-cyclical thing we go through, putting them all up and take them all down," he said.

But he said that, if JPMorgan Chase's credit card chargeoff rate ultimately settles at 4.5% — or about half where it stood in the third quarter — the company would "have to take down another $4 billion, $5 billion, $6 billion of reserves."

"My guess is that will be happening slowly over the next six quarters, and you'll see more rapid change if and when the economy starts to improve," he said. "The same will relate also to mortgage losses, by the way, and all other losses, for that matter."

Releases of reserves for credit card losses were once again dominant at major issuers. However, total releases exceeded credit card releases during the third quarter at Bank of America Corp. and JPMorgan Chase. At B of A, credit card releases have been declining since the first quarter, and, during the company's earnings call, Neil Cotty, its chief accounting officer, said, "You'll continue to see some release of loan reserves but not to the extent you've seen in the past."

Releases at Citigroup were concentrated in its retail-partners card portfolio, which has been slated for disposal. During the company's earnings call, Chief Financial Officer John Gerspach said the Citi-branded portfolio could follow suit after another three months of better credit trends. "We like to see two to three quarters in a row of continued improvement in credit losses and delinquency trends before we start releasing reserves," he said.

U.S. Bancorp stood out by keeping reserves steady, but the third quarter was the first since 2007 that it did not build reserves. CEO Richard Davis said growing loans and uncertainty about the economy and real estate weighed on its decision.

But "it's a lot more math than it is art," he said, and a reserve release is probable "in the future quarters," if credit continues to improve.


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