Executives at the biggest U.S. banks are for the most part wary about the near-term outlook for the American economy, and their own balance sheets back that up.
The banks are still setting aside billions of dollars now for loans that will go bad in the future, their fourth-quarter earnings reports showed over the past 10 days. At the same time, most banks' levels of problem loans at the end of the 2009 were at their high points for the year.
That combination explains why even as many of the big banks reported improving profit news, words such as "caution" and "challenging" crept into news releases and conference calls.
To plan for future losses, banks each quarter make what's called a loan-loss provision, and subtract the amounts directly from earnings. By making provisions, the banks build up a reserve for loan losses.
Then, when a bank decides to give up on a bad loan, it charges it against the reserve - the loans are referred to as charge-offs.
The good news is that total provision expense was lower for the seven biggest U.S. retail banks in the fourth quarter than at any time in the year, and aggregate charge-offs dipped from their high point in the third quarter, according to data compiled by Hill-Townsend Capital LLC, a Maryland bank analysis company.
The sobering news is that provision expenses exceeded charge-offs for six of those seven banks, suggesting they see a need to continue to build reserves as their problem loans, known more formally as "non-performing," hit their 2009 highs.
"The provisions are still pretty high," said Russ Yates, an analyst at Virginia firm SNL Financial LC. "They're declining, and the charge-offs are declining, but they're up there over 100 per cent. It's a positive thing, but I don't think we're out of the woods yet. With past performance and what they're seeing in the markets, they'd be wise to be cautious."
In a more stable environment, banks often make a quarterly provision about equal to its quarterly charge-offs. In the fourth quarter of 2009, however, six of the seven biggest U.S. retail banks continued to build reserves by provisioning more than their charge-offs.
All told, the banks - JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Bank of America Corp. and three smaller regionals - put $33.8-billion (U.S.) into their loan-loss reserves in the fourth quarter while charging off $30.3-billion worth of loans, according to the Hill-Townsend data.
Only Wells Fargo provisioned less than it charged off - $5.4-billion compared with $5.9-billion. Management of the San Francisco-based bank was widely seen as making more optimistic comments than their peers at JPMorgan, Citigroup and Bank of America. Those banks' provisions ran about 15 per cent ahead of their charge-offs in the fourth quarter.
The group of seven banks in the Hill-Townsend analysis (which also includes Pittsburgh-based PNC Financial Services Group Inc., Cincinnati-based Fifth Third Bancorp and Minneapolis-based U.S. Bancorp) reported an aggregate $132.3-billion in nonperforming loans, a number that steadily increased through 2009, albeit at a slower rate in the second half of the year.
Gary Townsend, CEO of Hill-Townsend, believes banks will begin cutting down on provisioning later in 2010 as they head into 2011, but will also be wary of perceptions. "No company wants to be accused of not providing sufficiently for credit [problems]in this environment."
Socking it away
U.S. banks and their rainy-day plans
America's biggest banks continue to set aside billions of dollars for potential bad loans.
|4Q provision||4Q||provision to|
|Bank of America||BAC||9,789||8,421||1.16|
|Fifth Third Bancorp||FITB||776||708||1.10|
|Source: Hill-Townsend Capital LLC|
Here's a look at what those banks set aside in 2009.
|Group of 7 Banks||1Q||2Q||3Q||4Q|
|Note: Provision expense and charge-offs in millions of U.S. dollars|
|Source: Hill-Townsend Capital LLC|