Thursday, January 27, 2011

Bank Revenue VS Efficiency Ratio

Below are two charts comparing the efficiency ratio (non interest expense / revenue net of interest expense) and revenue net of interest expense for JPM, WFC and BAC.

I won't add a lot of color as the charts speak for themselves.  For the past two fiscal years, JPM and WFC have experienced flat revenue growth while BAC has experienced revenue contraction.  Banks can be complicated animals to understand but if you break it down to very basic, big picture analysis they are actually easier to view.  There are some FASB accounting of the top line but no where near the balance sheet gimmicks of mark to myth.

Now look at the efficiency ratio, they have continually risen the past two fiscal years for JPM, WFC while BAC has experienced rapid growth.  Not a whole lot of FASB gimmicks here either.  The difference of these two is a deteriorating pre tax pre provision (PTPP) income.  

If the economy was growing one could argue that revenues will improve and non income expenses will "grow" into these new revenues and thus efficiency ratios will fall to more sustainable levels.  The problem though is home prices are deteriorating and the economy is stagnating.

Lastly, here is a very scary chart from a bank balance sheet risk standpoint.  The foreclosure process is going to get only longer in duration.  Many thought robo-signing would be resolved through some simple legislation or after thirty days of bank imposed moratorium.  That was four months ago.  Instead, we now see BAC announcing a halt to NODs in non judicial states in addition to the already halted judicial foreclosures.  Sure they can foreclose but first they need the proper paperwork.  Therein lies the problem for them.

So while foreclosures slow in the short term bank earnings may actually improve through the combination of accounting tricks that allow banks to accrue interest income on delinquent credits and further reductions in loan loss provisions and loan loss reserves.  Watch for further deterioration though in cash and cash equivalents as cash flow cannot hide behind FASB favorable rules.  At some point in the future, provisions for loan losses will surely grow as they did at the beginning of the crisis.


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