Banks Looking at Strong Q1 Earnings

by: Tom Brown

These two charts, which show banks’ quarter-to-quarter change in net chargeoffs and loss provision expense as they emerged from the real estate crunch in the early 1990s, provide a very good omen for banks’ first-quarter earnings reports. Take a look:

See the pattern? As banks’ credit recovered after the 1990s crunch, management ramped up chargeoffs in the fourth quarter especially — presumably since that’s when the auditors were watching the most closely or, more likely, because the fourth quarter tends to be the kitchen-sink quarter, when companies try to put problems behind them once and for all. In any event, banks sure didn’t hold back. Then in the first quarter, reality set back in and chargeoffs plummeted. The numbers are clear. In the three fourth quarters in 1990 through 1992, banks’ net chargeoffs rose by roughly a median 35%, sequentially, on average. Then in the three first quarters from 1991 through 1993, chargeoffs fell sequentially by roughly a median 45%. By those numbers, chargeoffs fell more in the first quarter than they had risen in the fourth. As you can see, the same pattern holds for sequential changes in loss provision.

Human nature having not changed much since the 1990s, I don’t see why the same pattern shouldn’t hold now. If it does, the effect on companies’ bottom lines figures to be substantial. At this point in the cycle, provision expense is by far the biggest swing item on a bank’s P&L. My prediction, therefore: look for no small number of earnings surprise from banks in the coming reporting season.

Bank earnings reports for the first quarter start in earnest on the week of April 11.