Magazine article American Banker

Bank Profits Still Hinge on Reserve Drawdowns

Magazine article American Banker

Bank Profits Still Hinge on Reserve Drawdowns

Article excerpt

Byline: Harry Terris

More than a year ago, Sheila Bair warned that reductions in loan-loss provisions couldnat drive bank earnings forever.

She was right, but reserve releases rebounded in the first quarter, and the decline in writeoffs of bad debt has continued to outpace drawdowns of allowances, suggesting more room to run.

Across the industry, reserve releases, or the amount by which chargeoffs exceed loss provisions, have accounted for 15% to 30% of quarterly net income since early 2010, assuming an effective tax rate of 35%.

Reserve releases jumped 32% from the fourth quarter to $8 billion in the first quarter, though growth in revenue meant that their contribution to the bottom line held even at about 14%. Still, without past set-asides running through income statements, the industryas return on equity would have been more than a percentage point lower at 7.8% during the period, and that much farther away from the range of 11% to 13% that prevailed in the quarters leading up to the recession.

Chargeoffs peaked at an annual rate of $220 billion in the fourth quarter of 2009, or 96% of aggregate reserves at the end of the period. In other words, banks were on pace to burn through their allowance in about a year. They didnat a chargeoffs eased and, at an annual rate of $87 billion in the first quarter this year, measured 48% of industrywide loss allowances. Thatas roughly on par with levels during the first three quarters of 2007. (The recession officially began that December. …

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