* JPMorgan, Bank of America, Wells Fargo expected to release
* Funds could offset lower mortgage revenue, higher legal
* Some analysts question "quality" of earnings
By Peter Rudegeair and Carrick Mollenkamp
Sept 13 Top U.S. banks will get billions of
dollars of extra profit this quarter from the money they set
aside in tougher times to cover bad loans.
Banks including JPMorgan Chase & Co, Wells Fargo &
Co and Bank of America Corp said this week that
more borrowers are paying their loans on time, which allows the
lenders to keep less money on hand to cover loan losses.
Dipping into the money they had previously set aside - known
as "releasing reserves" - is entirely legal, and banks have been
doing it for some time. But it will be particularly handy for
banks this quarter. Mortgage lending has slowed down, cutting
into a key source of income growth for the banks.
Meanwhile, overall loan growth has been tepid, Federal
Reserve data shows, signaling that there are few obvious sorts
of income growth to replace mortgages, and litigation costs for
many banks are rising.
"We are in a better quality environment that still is not a
growth environment," said Nancy Bush, an analyst at NAB Research
in Annandale, New Jersey.
JPMorgan is expected to release around $1.5 billion in the
third quarter from areas including credit card loans and
mortgages, finance chief Marianne Lake said this week at a
conference hosted by Barclays Capital. These reserve releases
will allow the bank to set aside more money to cover litigation
expenses, Lake said.
Wells Fargo expects to release more reserves in the third
quarter than the $500 million in released in the second, Chief
Financial Officer Tim Sloan said at the conference. He did not
provide a specific number, and a spokeswoman for the San
Francisco company declined to comment further.
Bank of America finance chief Bruce Thompson did not provide
an estimate of the bank's expected reserve releases when he
spoke this week, but he did say that much of its worst loans
have been written off, and he said in July that he expects
"continued reserve releases, particularly in its consumer real
Richard Staite, an analyst at Atlantic Equities in London,
estimated in a report on Thursday that the bank could release
$1.6 billion in the third quarter. He added that the Charlotte,
North Carolina, bank could reduce its $22 billion loan loss
reserves by 27 percent and still have enough to cover double the
amount of expected net loan losses.
Citigroup Inc, the third-largest U.S. bank, has not
given any guidance about reserve releases, but research firm
Portales Partners estimates that the 16 major banks it follows
have $14.7 billion of reserves that could be funneled into
earnings. A third of that is in residential real estate
portfolios, and another third is in commercial real estate, said
Portales research director Jennifer Thompson. The rest is in
areas including corporate loans and auto loans.
Banks do not have carte blanche to release reserves. They
have to point out that credit has improved enough such that
those reserves are no longer necessary. The reserve releases
boost pretax income, and regulators watch them closely to make
sure banks are not manipulating earnings.
Because the releases are not necessarily repeatable in the
future, some analysts are suspicious of them.
"It's not quality earnings," said Charles Peabody of
Executives at JPMorgan, Wells, and Bank of America
highlighted the strong performance of their loan books when
discussing their reserve releases. JPMorgan's credit card loans
are experiencing "20-year lows for delinquencies across the
industry," CFO Lake said at the conference.
Loans are also performing better because banks tightened
their underwriting standards after the financial crisis. The
mortgage loans Wells Fargo extended after 2008 "have virtually
no losses," CFO Sloan said.
Reserve releases were an important contributor to banks'
strong second-quarter results. They accounted for 14 percent of
JPMorgan's second-quarter earnings, 6 percent of Wells Fargo's
and 16 percent of Bank of America's, according to a September
report from Bernstein Research.
However, reserve releases can offset lower revenue for only
so long before banks have to find ways to make up the
difference, NAB's Bush said.
"The industry is in this transition period, but
transitioning into what? You hope it's into better growth,
better margins, and all the stuff that goes into that, but it
doesn't feel that way yet."
JPMorgan, Wells Fargo and Bank of America will report
third-quarter earnings in mid-October.