Friday’s WSJ reported: “The rainy-day funds that U.S. banks have been tapping to boost their earnings could soon begin to dry up, and that doesn’t bode well for bank profits. Many banks have been ‘releasing’ reserves against bad loans since the worst of the crisis passed and the economy began recovering. That money flows to the bottom line, helping some banks boost earnings at a time when lending and trading profits have been soggy.”
The article examined Q4 data released by the top 10 US-owned commercial banks. A less alarming picture is provided by data for all FDIC-insured institutions, though the data are only through Q3-2011. The data show that their provisions for loan and lease losses have been below their net charge-offs since Q1-2010. That’s after exceeding charge-offs from Q1-2006 through Q4-2009.
A better way to see what is happening is to cumulate the data since 1984. That shows that reserves for losses jumped from $131 billion at the end of 2007 to a record high of $290 billion during Q4-2009, and fell to $230 billion during Q3-2011. In other words, there is room for reserves to fall some more and boost earnings this year as long as net charge-offs continue to decline, as they have been every quarter since Q1-2010. (More for subscribers.)