Delinquencies Are Slowing, But Losses Are Still Growing

Here is my take on bank earnings reports. I’m coming at this from a bond guy’s perspective, so I’m a little less worried about whether certain revenues are recurring or not. By this I mean, JP’s fixed income trading revenues were probably higher than what we can realistically expect in the future. That being said, JPMorgan (NYSE:JPM) will probably have robust trading revenues in future quarters, just maybe not this robust. Same with the elevated NIM. Remember, bond guys don’t care whether EPS is $1.5 or $1.55/share. We care about ticking time bombs.

So I’m more interested in whether banks are working through their problems. We know it will be a while before loan losses start falling, but at some point, banks will have actually provisioned enough. I don’t think we’re there now, nor do I think we’ll be there in the next couple quarters. So what I want to see banks doing is using this period of elevated NIM/trading gains to build reserves against future.

What I don’t want to see is banks using the recent slowing in consumer delinquency growth (note I said slower growth) to project lower loan losses in the future, and thus manipulate earnings higher. That’s just not an honest assessment of the situation, as far as I’m concerned. Yes, maybe delinquencies are slowing, but losses are still growing. There is no way around that.

Witness the difference between J.P. Morgan’s report yesterday and Citigroup’s today.

Here is JP’s summary of their consumer loan portfolio. First home lending: (circles were in the original).

Home equity portfolio looks improved, but weakness everywhere else. Then there is credit cards. Same story.

Alright, so not some kind of disaster, but clearly loan losses continue.

Now here is Citi’s home lending portion of their presentation.

Same story right? 2nd Mortgages would include Home Equity, so maybe some improvement there, but on first mortgages, problems continue, actually seem to be accelerating.

On commercial, Citigroup (NYSE:C) didn’t break out commercial loan performance in their presentation, and J.P.’s doesn’t show much change. Probably just reflects the fact that commercial losses are coming whereas residential losses are here.

So what did both companies do with this information? J.P. increased consumer loan loss reserves by $2 billion to 4.6% despite the fact that overall charge-offs declined. Citi only increases loan loss reserves by $800 million to 6.4% of all loans. The ratio of loss allowance to charge-offs is 1.2x for J.P. Morgan, its 1.1x for Citigroup.

This all bothers me. It seems to me that the trends are weaker for Citi but they are taking less in loan loss provisions when compared to their charge-offs.

Maybe I’m making too much of this. But I can tell you this. I own JPM bonds. I don’t own Citi.

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