| Big banks have a big credit problem
| Monday, April 20, 2009
|By Colin Barr
Banks are socking away funds for future loan losses at a record clip. But at the sickliest institutions, problem loans are rising even faster.
On Monday, Bank of America (BAC, Fortune 500) became the latest big bank to report a stronger-than-expected quarterly profit, posting net income of $4.2 billion, or 44 cents a share. Analysts had expected a profit of just 4 cents a share.
Like its rivals Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500), Charlotte-based BofA pointed to strong fixed-income trading results and a big rise in earnings from its mortgage business.
BofA managed to post the big profit even as it set aside more than $6 billion to cover future loan losses. The bank's loan loss reserve now stands at $30 billion -- double its year-ago level.
BofA expects more borrowers will fall behind on payments or default on their loans as job losses deepen and the economy struggles through its worst recession in decades.
While BofA has doubled its loan loss reserve, nonperforming assets -- loans that are no longer producing income as borrowers fall behind on payments -- have more than tripled, reflecting the weakening economy and the acquisition of troubled Countrywide and Merrill Lynch.
As a result, BofA's loan loss reserve now covers just 121% of its nonperforming loans -- down from 203% a year ago.
That means the bank has a thinning cushion just as the industry braces for rising losses on commercial and industrial loans, as well as continuing declines in residential real estate.
Another bank with a thin cushion is Citi, which reported an unexpected $1.6 billion first-quarter profit Friday even as credit costs doubled from a year ago.
Though Citi's loan loss reserve has jumped 78% from a year earlier, nonperforming assets have more than doubled over the same span. As a result, Citi's loan-loss coverage ratio has slipped to 121%, from 177% a year earlier.
In contrast, the stronger big banks -- JPMorgan, which posted a $2.1 billion first-quarter profit last Thursday, and Wells Fargo, which said earlier this month it expects to make $3 billion in the quarter -- have healthier coverage ratios, thanks to extensive reserve building.
|posted by citizen jerk @ 12:44 PM