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.