TEXT-Fitch: Provision growth marks U.S. banks' asset quality plateau

Fri Jan 25, 2013 9:23am EST

Jan 25 - Increases in credit provision expenses by the largest U.S. banks in the fourth quarter will likely continue through 2013, according to Fitch Ratings. As sequential improvements in asset quality continue to wane over coming quarters, we expect higher provisions and diminishing reserve releases to become common features of banks' financial results.

A number of banks have reported sequential increases in loss provisions for the fourth quarter, bucking a trend of continuous provision declines since the peak of the credit crisis. Among commercial banks surveyed in our quarterly review of bank results, only KeyCorp (KEY), JP Morgan Chase (JPM), SunTrust (STI), and US Bancorp (USB) reported declines in provision expenses quarter over quarter. JPM was a clear outlier, with a 63% decline in provisions, driven by a large decline in net charge-offs (NCOs). Still, JPM's reserve releases were essentially flat quarter over quarter as NCOs fell.

As the ratio of reserves to loans falls to a level more consistent with stabilizing credit quality, we expect reserve releases for U.S. commercial banks to come to an end soon. The average ratio of roughly 2.4% for banks in our quarterly report is now approaching an expected normalized level in the range between 1.5% to 2.0%, depending on the risk profile of individual banks. This suggests that room for additional reserve releases in 2013 is dwindling.

Counter to market expectations, Citigroup's (C) reported a relatively modest reserve release in 4Q12. The bank noted that the still-fragile nature of the housing recovery was the main reason for the decline. Although this ran against market expectations, Fitch viewed the conservative release favorably amid a still tentative economic recovery. Further, it is consistent with our overall view that industry asset quality is likely reaching a plateau in 2013, four years after the worst phase of the credit crisis.

Recent trends in U.S. commercial bank asset quality are discussed in more detail in Fitch's "U.S. Banking Quarterly Comment: 4Q12," dated Jan. 25, 2013. In addition to a detailed review of fourth-quarter bank results, the report offers insights into recent drivers of capital markets activity, mortgage banking trends and implications of the recent foreclosure settlement reached with U.S. regulators.

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