Daily News: July 22, 2013

Fitch: More Reserve Releases Likely for Largest U.S. Banks

Fitch Ratings said that headline earnings numbers for the largest U.S. banks have been helped considerably by large releases of loan loss reserves in the second quarter. Fitch Ratings said it believes that over the near term, additional modest reserve releases for these banks are still possible given current reserve levels and favorable asset quality trends. However, core earnings performance remains lower than historical standards, excluding these releases.

Fitch said it thinks this indicates a healthy level of pro-cyclicality in the biggest banks earnings, as credit quality for most lending products is likely near a cyclical peak, providing room for ongoing reserve releases and lower provisioning. So far, releases for the large banks have been concentrated in credit card and mortgage businesses.

Cumulative second-quarter reserve releases for JP Morgan (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) represented $3.5 billion of earnings, with JPM having the largest release both on an absolute basis at $1.3 billion and on a relative basis calculated as an annualized percentage of assets at 0.22%. This compares with the average release annualized as a percentage of assets of the four institutions above of 0.17%, according to Fitch.

This reverses a trend of still significant, but declining reserve releases that had begun to appear last year as credit provisions and net charge-off levels stabilized. Fitch said it recognizes that it is likely that continued strong credit trends and improving home prices on a national basis contributed to the reversal. Reserve levels remain at adequate levels and above long-term historical averages.

The earlier declines in releases followed observations by some bank regulators in 2012 that large reserve releases might be used solely for the purpose of boosting bank earnings.

Fitch added that notwithstanding the releases, core second-quarter earnings for the four banks cited above remained strong, but were weaker than headline numbers suggested. Relatively good capital markets results in a tough rate environment supported earnings, though JPM and WFC have noted that mortgage results are likely to come under pressure in the second half of the year following the recent spike in interest rates.

Fitch noted that future earnings performance for the big banks — and potentially to a greater extent for more regionally focused banks — will be more heavily depend on loan growth and growth in non-interest income. The latter will be challenged given the expected deterioration of mortgage banking results in a higher rate environment.

To read the full Fitch news release click here.