Wednesday, February 23, 2011

Bank Profitability Rises FDIC Report

The FDIC issued a report today on the strength of bank earnings in Q4 2010 versus Q4 2009.  Earnings are up $23.5 billion.  Sounds great right?  Banks are recovering as clearly the headlines states.  CNBC reports the following.

"The banking industry continues to recover from the 2007-2009 financial crisis but lending will need to pick up if progress is to continue, Federal Deposit Insurance Corp Chairman Sheila Bair said on Wednesday.

Industry profits were up considerably from a year ago standing at $21.7 billion in the fourth quarter of 2010, which compares to a net loss of $1.8 billion a year ago, according to the quarterly banking report released by the agency.

Most of the increase was due to banks putting aside less to guard against loan losses.

Banks put aside $31.6 billion in the fourth quarter for losses, about 50 percent less than a year ago."

In case you missed it, banks put aside 50% less for reserves against credit losses in Q4 2010 versus Q4 2009.  In Q4 2009 approximately $60 billion was charged to reserves for credit losses.  In Q4 2010 the number was $31.6 billion.  The graph below shows the percent reserved for credit losses for JPM, WFC, C, BAC.  Notice the improving trend, meaning they are reserve less as a percent of total credits.  

Improving credit quality?  What?  Banks are not extending credit because they already have enough homes coming back to them.  Interest rates are rising putting further pressure on home prices.  About 40% of CRE to be rolled in 2011 does not meet rating agency standards (do rating agencies really have any standards in the first place?).

  • BAC just restated goodwill impairment and credit card losses retroactively from 2009 through 2010 by an additional 10 billion.
  • The CFO of WFC abruptly left in the midst of an internal review of their credit quality.  Is there a reason he could not finish the review and sign off on the audit.  I mean he is only 60 and makes north of $5 million.  He actually took an unpaid sabbatical for a few months at which point retirement is more financially beneficial.
  • Home prices have begun double dipping, meaning higher strategic defaults.
  • The volume of homes to go from delinquent to REO is growing.
  • Second tier credits still have yet to be marked down.
  • Didn't the Fed just tell all banks to stress test against a GDP decline and unemployment at 11%?

Don't fall for it.  Read beyond the headlines from CNBC.  Banks are a mess and at some point, their bullish bet on improving credit quality will result in them taking a massive hit to earnings.  


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