Why Bank Earnings Could Face Rude Awakening

FDIC eagle seal in the main lobby of the headquarters building by the White House. (Photo credit: Wikipedia)

San Francisco, Oct.8, hot stock picks .-  With JPMorgan and Wells Fargo on tap to report this week, some investors maybe questioning whether the depletion of loan loss reserves — the money banks set aside to pay for loans that turn sour — is too premature as credit quality keeps improving. (Read More: 10 Big Bank Stocks Gearing Up for Third-Quarter Earnings.)

A recent report from the Federal Deposit Insurance Corporation showed that banks’ quarterly provisions, or the amount that banks are allocating to these bad loans, have slowed to pre-crisis levels. In the second quarter, the amount set aside by U.S. banks reached its lowest total in five years.

That trend has raised serious concerns among key banking regulators — including those at the Office of the Comptroller of the Currency.

In late September, OCC chief Thomas Curry warned banks that “too much of the increase in reported profits is being driven by loan loss reserve releases” and that the issue “has to be a matter of great concern” as risk levels remain elevated for the industry.

Citigroup [C  34.78    0.01  (+0.03%)   ] — which at the peak contributed the most of any bank, $12.7 billion, to these allowances — released the most from its reserves in the last quarter. Citi cut contributions by $2.3 billion, roughly 7 percent of its $34.4 billion reserves, according to filings.

For the same period, Bank of America [BAC  9.28    -0.04  (-0.43%)   ] cut $2 billion from its reserves, which totaled roughly $31 billion in the second quarter. Bank of America’s reserves cover mortgages as well as U.S. credit cards and consumer loans. ... Continue to read.

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