Lighter Loan Losses Help Propel Big Banks' Earnings Above Expectations

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bankThanks to lower losses on loans and credit cards, America's big money center banks are managing to eke out profits and beat analysts' earnings expectations, despite a sharp falloff in trading income due to the stock-market correction.

Bank of America (BAC), the biggest U.S. bank by assets, reported income of $3.1 billion, or 27 cents a share, Friday, down from $3.2 billion, or 33 cents a share, a year earlier. Analysts had expected 22 cents a share, according to Reuters.

Citigroup (C) posted net income of $2.7 billion, or 9 cents a share, its second straight quarter of profit, down from $4.3 billion or 49 cents share, a year earlier. Analysts had expected 5 cents.

JPMorgan Chase (JPM) reported earnings of $4.08 billion, or $1.09 a share, when it released results on Thursday. That compared with analyst estimates of 71 cents a share, according to Bloomberg.

Analysts Surprised by Size of Loss-Reserve Reductions

"Credit quality is improving more than anticipated," Bank of America CEO Brian Moynihan told CNBC.

Bank of America said provisions for credit losses in the quarter were $8.1 billion, $1.7 billion lower than the first quarter and $5.3 billion lower than in the same period last year. "The reserve reduction in the current quarter was primarily due to improved delinquencies, collections and bankruptcies in domestic credit-card and consumer-lending businesses and improved credit profiles in the commercial portfolios," the bank said in a statement.

Barclays Capital analyst Jason M. Goldberg said BofA's entire outperformance compared with analyst estimates was due to analysts not taking into consideration such a large reduction in loss reserves. "Relative to our forecast, the entire beat was driven by a lower-than-modeled loan-loss provision," Goldberg said in a note to investors.

Citigroup, which is still owned by the taxpayer, reported that credit losses declined by $422 million, or 5%. It reduced reserves for loan losses by $1.5 billion, compared with a $53 million reduction in the first quarter.

At JPMorgan Chase, the bank booked a $1.5 billion reduction in its loan-loss reserve, which helped boost earnings by 36 cents a share. CEO James Dimon nonetheless warned that losses from consumer loans "remain at extremely high levels."

Investment Banking and Trading Hit

The picture was not so bright at the banks' investment banking and trading operations. It's a sign that the outsized profits Wall Street earned during the stock market's recovery from the financial crisis has come to a grinding halt, according to some analysts.

At JPMorgan Chase, investment banking profits were $1.4 billion, down a whopping 44% from the first quarter, when virtually all investment banks reported making a profit every day thanks to the booming global markets. Investment banking was down 6% from the same period a year earlier.

Bank of America reported that profits at its global banking and markets unit fell to $927 million, from $3.2 billion in the first quarter and $3.9 billion in the same quarter a year ago. That's a 71% decline since the first quarter. The company said it was taking risk down to more acceptable levels.

At Citi, revenues from its securities and banking unit were $6 billion, down $2 billion or 26%. The declines were "driven by lower fixed-income markets, equity markets, and investment banking revenues," Citi said in a statement. Equity market revenues declined by 49%, and investment banking revenues were down 36% from the first quarter.

Impact of Financial Regulation Overhaul

The banks are also beginning to indicate how much they think the recent financial legislation may impact their bottom lines.

Bank of America said the Durbin amendment, which was contained in the financial regulation overhaul passed Thursday by the Senate, could cost the company $1.8 billion to $2.3 billion in annual revenues. The law calls for a reduction in the amount banks can charge retailers for processing debit-card transactions. It also said it may suffer a further $1 billion reduction because of adoption of the Credit Card Act and Reg-E, which are new rules on overdraft charges.

"We believe that some large banks may shift their consumer-banking focus to a more affluent/high-net-worth product focus," said CreditSights analysts. "However, our view is that BofA's existing customer base is too broad-based for this strategy to work. Instead, we sense that BofA must focus on gaining economies of scale and encouraging customer behavior to lower cost banking channels."

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