Banks have nearly picked the last of the low-hanging earnings fruit.
After ten quarters where reductions in loan-loss cushions made up perhaps 10% to 30% of industrywide net income, reserve releases showed clear signs of tapering at the end of 2012. In fourth quarter reports, executives at big banks warned that credit quality is stabilizing after a dramatic post-recession recovery, though they said improvement in the housing market could open up another reservoir from which to draw down allowances. (The following graphic presents data on individual banks in the first tab and industrywide data in the second. Interactive controls are described in the captions. Text continues below.)
Bank of America’s (BAC) reserve release, or the amount by which chargeoffs exceeded loss provisions, fell by $1.4 billion from the third quarter to $900 million in the fourth quarter. Bruce Thompson, the company’s chief financial officer, told investors in January that “most portfolios are close to stabilization and overall reserve reductions are expected to continue but at reduced levels.”
Citigroup’s (NYSE:C) reserve release fell by $1.3 billion to about $140 million. “Our credit trends are normalizing,” Chief Executive Michael Corbat said.
At Wells Fargo (WFC), the release fell by about $500 million to $250 million. “We continue to expect further reserve releases in 2013 but at a lower level than 2012,” said Chief Financial Officer Timothy Sloan.
The reserve release at JPMorgan Chase (JPM) was about flat at $970 million, but for the second quarter in a row the company stood pat with its allowance for bad credit card loans, with provision expenses matching chargeoffs. “Credit card is near the end,” said Chief Executive Jamie Dimon. “There could be more, but it is near the end.”
Provisioning for credit cards, a form of unsecured lending that typically generates relatively high loss rates, has been the swing factor in the buildup and subsequent drawdown of banks’ overall credit allowances. Credit card reserve releases explain about two-thirds of the $17 billion by which total chargeoffs have exceeded provisions at JPMorgan Chase since 2010.
Across the industry, reserve releases actually increased $1.3 billion from the second quarter to $7.6 billion in the third quarter. (Complete fourth quarter data is not available yet.) The increase reflected chargeoffs of home equity and other consumer loans that were not matched by provisions, however, as lenders complied with new regulatory guidance on how to record loans to borrowers who had gone through Chapter 7 bankruptcy.
While it may be that no other loan category will rival the level of reserve releases delivered by credit card portfolios, executives said there could be some room left to maneuver in home loans.
“We’ve not yet begun to release mortgage reserve,” Citi’s Corbat said. John Gerspach, the company’s chief financial officer, said Citi wants to make sure that “strong, positive trends” observed in the housing market “are sustainable.”
JPMorgan Chase’s Dimon said, “Mortgage reserves are going to have to come down as chargeoffs come down and chargeoffs are going to come down.”