So I'm more interested in whether banks are working through their problems. We know it will be a while before loan losses start falling, but at some point, banks will have actually provisioned enough. I don't think we're there now, nor do I think we'll be there in the next couple quarters. So what I want to see banks doing is using this period of elevated NIM/trading gains to build reserves against future.
What I don't want to see is banks using the recent slowing in consumer delinquency growth (note I said slower growth) to project lower loan losses in the future, and thus manipulate earnings higher. That's just not an honest assessment of the situation, as far as I'm concerned. Yes, maybe delinquencies are slowing, but losses are still growing. There is no way around that.
Witness the difference between J.P. Morgan's report yesterday and Citigroup's today.
Here is JP's summary of their consumer loan portfolio. First home lending: (circles were in the original).
Home equity portfolio looks improved, but weakness everywhere else. Then there is credit cards. Same story.
Alright, so not some kind of disaster, but clearly loan losses continue.
Now here is Citi's home lending portion of their presentation.
Same story right? 2nd Mortgages would include Home Equity, so maybe some improvement there, but on first mortgages, problems continue, actually seem to be accelerating.
On commercial, Citi didn't break out commercial loan performance in their presentation, and J.P.'s doesn't show much change. Probably just reflects the fact that commercial losses are coming whereas residential losses are here.
So what did both companies do with this information? J.P. increased consumer loan loss reserves by $2 billion to 4.6% despite the fact that overall charge-offs declined. Citi only increases loan loss reserves by $800 million to 6.4% of all loans. The ratio of loss allowance to charge-offs is 1.2x for J.P. Morgan, its 1.1x for Citigroup.
This all bothers me. It seems to me that the trends are weaker for Citi but they are taking less in loan loss provisions when compared to their charge-offs.
Maybe I'm making too much of this. But I can tell you this. I own JPM bonds. I don't own Citi.
For an old jaded market watcher, I guess the reactions would be, "what else is new?"
ReplyDeleteVikram looks like he is rehashing the same old 1991 - 1993 citicorp playbook (http://www.nytimes.com/1991/10/18/business/citicorp-s-burden-analysts-ask-if-all-rumors-fly-reed-s-future.html?pagewanted=all).
In the intial stages of a recovery, earnings quality are lousy anyway and the street is quite willing to give the company a second or third chance.
2 datapoints make a line, 3 datapoints make a trend, when you get 4 datapoints and the trend is undisputably downward, that's when you the puke from insti accounts
A less jaded market watcher who believes both JP and Citi notes a couple of facts:
ReplyDeletea) Citi now has 36B of reserves (5.6% of loans) on a smaller book than JP, who now has 31B of reserves (5.2% of of loans) on a book that includes the WaMu fun.
b) Citi was the first huge bank to throw its managment overboard and start marking stuff down in late 07. Stands to reason they might be farther through the cycle.
c) JP is still probably getting its hands around the WaM debacle. Note: they expect charge-offs may get as high as 24% on the WaMu cards portfolio. God only knows how bad that Option ARM book gets.
d) Citi has de minimis CRE exposure (8B). That is why you don't see it. JP has 3 times that exposrure, I think. So this is one place Citi will not be hurting relative to its peers.
None of this takes away from the fact that JP made a 3.6B and Citi was flat. But it is eminently reasonable to expect Citi to be adding reserves at a slower pace than JP in Q309.
On JP, if they marked down WaMu loans at the time of the merger, then they wouldn't carry reserves against it. Unless the expected losses were now even greater than initially suspected. At least that's my understanding.
ReplyDeleteIt makes it hard to analyze two banks 1 to 1. But if anything that makes JPM stronger than C.
Are they reporting net purchases or sales of subprime mortgages including loan amount purchased/sold and price it traded at?
ReplyDeleteThey should be selling the subprime debt little by little quarter over quarter instead of assuming that they can pick winners out of the individual loans. Look for a big write off in last quarter of 2009 since this is the bad year and they want to get all of the loss out of the way for 2010.
JP did mark down WaMu loans 10% (30b) at the time of the merger. The WaMu loans are, by all accounts, a few std deviations worse than anything the big 4 banks did. According to the release, JP is marking those down even more now. I'm sure they expected it and I'm sure they are doing well with all of the WaMu deposits, but that loan book is a disaster. Citi's biggest problem right now with respect to the other 3 big banks is client/investor/employee perception, morale and confidence. Not relative quality of assets or capital. Unless, of course, one believes that new management and financial control is lying about problems caused by the previous management.
ReplyDeletethe other thing I always look at is The change in L1 to L2, L3 assets. E.g. if there was a larger transfer than normal.
ReplyDeletehttp://blogs.wsj.com/marketbeat/2009/10/16/citigroup-earnings-lower-loan-loss-provisions-a-good-sign/
ReplyDeleteAC: what´s your take on the modification initiatives?
do they distort real earnings?
we have learned that TRIAL modifications just started and that cure rates at former initiatives weren´t pretty encouraging.
JPM proudly claimed that they took the lead in this program.
but how do they treat the underlying mortgages?
are they in any way recognized as NPL and are they provisioned for?
or are those problemativ mortgages just treated as healthy ones and make the banks look healthier at the moment?
thanks a lot!
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