Don't be deceived by what looks like a relatively benign set of third-quarter earnings from U.S. banks. Granted, there was a distinct lack of nasty surprises. And some of the headline numbers looked pretty good. But the industry has a long way to go before it gets out of the woods.
Many banks pointed out a slowing pace of defaults. That's certainly encouraging for shareholders. But it's not necessarily a sign that the economy is on the upswing: banks have tightened their lending standards, so delinquencies ought to drop. And few bank bosses expect loss rates to actually improve until well into next year.
Banks are making fewer loans. Commercial and industrial loans, for example, dropped $270 billion, or 16%, year-to-date compared to for the same period last year, according to Morgan Stanley. That adds some balance-sheet stability, especially with deposits continuing to rise. But it also hits profits.
A boom in home loan refinancing helped overcome some of that in the first half of the year. That is now slowing. And house prices - and sales - could dip again in the next month or so, once the impact of first-buyer home credits and other government incentives run out, Lazard Asset Management predicts.
Broadly speaking, there weren't as many one-off funnies as there were in previous quarters. But banks still found other ways to juice earnings. Wells Fargo, for instance, set aside just $1 billion against loan losses despite high credit costs and one of the lowest Tier 1 common equity ratios of its peers.
Wells also got a boost as some loans it bought with Wachovia proved less problematic than once thought. It was a similar story at PNC, which swallowed National City.
And several banks have been able to rely on benign trading environments - and not just within their investment banks. JPMorgan's corporate treasury, for example, held $373 billion of securities at the end of September, a 148% increase on the year before.
Wells Fargo's holdings have more than doubled to $186 billion, around a quarter of which is invested in non-agency mortgages yielding almost 10%. That's a handy fillip to asset returns. But sitting on a portfolio of bonds arguably isn't a bank's core business - and is liable to hurt if the economy fails to rebound.
Taken together, if all these measures help shore up balance sheets, that's a plus. But with commercial real estate woes spreading and a number of smaller banks now having to raise capital, the financial sector may just be taking a breather.