J.P. Morgan vs. Citi: Some Banks Building Reserves Against Future Losses. Others Aren't

Here is my take on bank earnings reports. I'm coming at this from a bond guy's perspective, so I'm a little less worried about whether certain revenues are recurring or not. By this I mean, JPM's fixed income trading revenues were probably higher than what we can realistically expect in the future. That being said, JP will probably have robust trading revenues in future quarters, just maybe not this robust. Same with the elevated NIM. Remember, bond guys don't care whether EPS is $1.5 or $1.55/share. We care about ticking time bombs.

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 (JPM) report Wednesday and Citigroup's (C) on Thursday.

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.

Disclosure: Author has positions in JPM

Comments

[tsw0014u:]

"Maybe I'm making too much of this..."

What? A disingenuous C short and shill, prostelytizing about C's loan-loss reserves, making too much? Imagine that! lol You and this online, bought-and-paid for rag couldn't get any more obvious re your positions and agenda, which in and of itself is ludicrous in it's transparency. You charlatans fool no one. Journalistic wannabes coupled with people like you, Cramer wannabes, are just two more online blights folks need to wade through in their readings; no more, no less. The emperor wears no clothes dummy.

Oct 18 11:14 AM

[tommiegun:]

On 10/17/09
tsw0014u said:

Maybe I'm making too much of this..."

What? A disingenuous C short and shill, prostelytizing about C's loan-loss reserves, making too much? Imagine that! lol You and this online, bought-and-paid for rag couldn't get any more obvious re your positions and agenda, which in and of itself is ludicrous in it's transparency. You charlatans fool no one. Journalistic wannabes coupled with people like you, Cramer wannabes, are just two more online blights folks need to wade through in their readings; no more, no less. The emperor wears no clothes dummy.

Yeah!

Oct 18 12:57 PM

[apppro:]

The point I take away is that banks are putting aside money, some more then others!

Fine, and if true (and everyone says it is) isn't this EXACTLY what all the naysayers wanted.

Fine, and now that they are getting what they wanted, well enough is still not enough for those naysayers with some banks.

Fine, but even if the banks are putting enough aside, those same naysayers scream that the banks are not loaning enough.

Fine, but how can you keep loaning AND puttting aside enough to satisfy people who will never be satisfied no matter what anyone does?

Answer: YOU CAN'T! NO ONE CAN! All we can hope for is that the banks will put enough aside that will satisfy themselves, SO that they can feel comfortable enough into making loans WITHOUT having to look over their shoulders for those very same naysayers.

Oct 18 03:24 PM

[DonFurio:]

I'm sure a lot of you know, but the regulators actually told SunTrust that they could not build reserves a few years back because they claimed they were "padding their portfolio".


On Oct 18 03:24 PM apppro wrote:

> The point I take away is that banks are putting aside money, some
> more then others!
>
> Fine, and if true (and everyone says it is) isn't this EXACTLY what
> all the naysayers wanted.
>
> Fine, and now that they are getting what they wanted, well enough
> is still not enough for those naysayers with some banks.
>
> Fine, but even if the banks are putting enough aside, those same
> naysayers scream that the banks are not loaning enough.
>
> Fine, but how can you keep loaning AND puttting aside enough to satisfy
> people who will never be satisfied no matter what anyone does?<br/>
>
> Answer: YOU CAN'T! NO ONE CAN! All we can hope for is that the banks
> will put enough aside that will satisfy themselves, SO that they
> can feel comfortable enough into making loans WITHOUT having to look
> over their shoulders for those very same naysayers.

Oct 19 01:11 PM

[cosmic inve...:]

You're right, he couldn't be more obvious, because HE TOLD YOU his position. And he told you why. Whether or not you agree is for grown ups to decide. Who's the dummy?


On Oct 18 11:14 AM tsw0014u wrote:

> "Maybe I'm making too much of this..."
>
> What? A disingenuous C short and shill, prostelytizing about C's
> loan-loss reserves, making too much? Imagine that! lol You and this
> online, bought-and-paid for rag couldn't get any more obvious re
> your positions and agenda, which in and of itself is ludicrous in
> it's transparency. You charlatans fool no one. Journalistic wannabes
> coupled with people like you, Cramer wannabes, are just two more
> online blights folks need to wade through in their readings; no more,
> no less. The emperor wears no clothes dummy.

Oct 19 03:07 PM