Releases of loan-loss reserves
Industrywide, banks have let allowances run down by about $45 billion since the first quarter of 2010. So far the largest release (the amount by which chargeoffs exceeded provisions) was in the first quarter this year at $13 billion (see charts).
But the decline in chargeoff rates (the pace at which banks have written off loans as uncollectible) has generally outrun reserve reductions, and, absent a large reversal in the economy, releases should be a big factor once again in the second quarter, and perhaps for many periods to come.
"We're expecting net chargeoffs to remain at a higher-than-normal level for an extended period of time," said Marty Mosby, an analyst with Guggenheim Securities LLC. Nevertheless, "allowance recapture … is enough to offset that elevated net chargeoff level and bring the provisioning down to a normal level. So even though your chargeoffs remain high, you've already kind of paid for that in the reserving that you did in the early parts of the cycle."
Releases have been concentrated among the largest banking companies, and among the giants, they have been concentrated in the credit card business, where loan performance has recovered quickly
Bank of America Corp.'s first-quarter reserve release accounted for more than 80% of its earnings per share, assuming a 35% tax rate. Reserve releases were equivalent to about 70% of earnings per share at Citigroup Inc. and 30% at JPMorgan Chase & Co.
While weakness in home prices has kept the pressure on mortgage portfolios, reserve releases have also been important at companies with relatively small card operations. At Wells Fargo & Co., where a loss allowance of $22 billion exceeded chargeoffs of $13 billion at an annual rate in the first quarter by about 75%, reserve releases accounted for about 20% of earnings per share.
To be sure, industrywide loss reserves generally stood at more than 2.5 times annual chargeoffs in the periods leading up to the recession. While the cushion has improved substantially since a low at the end of 2009, industrywide reserves were still only a bit above 1.5 times chargeoffs at an annual rate in the first quarter.
Moreover, on the back side of the credit cycle, attention has turned from the flow of loss reserves into capital through the income statement — "ink on paper," JPMorgan Chase Chief Executive Jamie Dimon has termed it — giving way to a vigil for a return to revenue growth.
There is a degree of "apathy" over the lift from releases among investors, Mosby said, "because everybody's kind of normalized for the asset quality cycle already."
[IMGCAP(1)]
