Commuters are reflected in stone as they walk past the JPMorgan headquarters in New York in this May 17, 2012, file photo.EDUARDO MUNOZ/Reuters
Don't listen to the naysayers – lower U.S. bank loan losses should be welcomed.
This week a slew of U.S. banks reported solid second-quarter earnings, instilling more confidence in the American banking system. But the doubters still argue that too much of these profits come from lower credit provisions, creating accounting gains rather than hard dollars.
This quarter, JPMorgan Chase & Co. released $1.5-billion (U.S.) from its loan loss reserves, while Citigroup Inc. released $784-million of its own.
The behemoths aren't the only ones seeing gains. PNC Financial also saw loan losses shrink, plummeting 37 per cent this quarter to $157-million.
No doubt, drops like these create paper profits. But remember this: When credit losses started racking up a few years back, the banks had to pour money into credit provisions, hurting their bottom lines at the time. They've paid a price for being able to reverse these provisions today. These aren't just "free gains."
Better yet, the very fact that the banks can release more and more provisions means they're confident they'll lose less money on bad loans. That can only mean they're seeing tangible benefits from the economic rebound. Yet again, more proof that things are getting better in the U.S.
The earnings releases also offered some encouragement for Canadian banks. Solid fixed-income figures from the likes of Goldman Sachs Group Inc., Citi and JPMorgan relieved worries that the messy bond markets would wreak havoc on banks' bottom lines.
After long-dated U.S. Treasury yields started to skyrocket in May, no one really knew how that would affect fixed-income revenues. Now we know they didn't matter much, with JPMorgan's fixed-income revenues jump 17 per cent from the year prior, and Citi's by 18 per cent.
No one knows if this will continue, and Goldman's earnings report noted that "market conditions across products became more challenging during the latter part of the quarter, as interest rates and market volatility increased." But Bloomberg News noted that these earnings jive with what Goldman president Gary Cohn argued in May, when he quipped it was simply an "urban legend" that banks would have trouble scoring fixed-income revenues in an era of rising rates.
The thing to watch now is what current rates do to mortgage underwriting. This quarter, JPMorgan chief executive Jamie Dimon noted that rising yields are having an effect on origination, and mortgage lending brings in a lot of money for traditional banks.
(Tim Kiladze is a Globe and Mail banking reporter.)
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