Big Banks Not Ready Give Up Reserve Releases a Few Names Include Citigroup Inc. (NYSE:C), J.P. Morgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Wells Fargo & Co. (NYSE:WFC)

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By Hanson So on July 22, 2014 Consumer Staples

The release of loan-loss reserves for the big banks has apparently persisted longer than anticipated.

According to second quarter earnings release, top banks including Citigroup Inc.(NYSE:C) +0.87%, J.P. Morgan Chase (NYSE:JPM) +0.71%, Wells Fargo & Co. (NYSE:WFC) +1.12%and Bank of America Corp. (NYSE:BAC) had a combined reserve release of $2.25 billion up nearly from $1.88 billion in the first quarter, but a drop of $1.88 billion from the same quarter last year. The total is still much too less in contrast to the $9.12 billion release in 2011’s first quarter.

The banks continue to see improvement in customer’s credit level, but the earnings, rather than generating earnings from operating businesses, partly rely on freeing some of the bank’s rainy-day cushions.

The practice of “releasing” bad-loan reserves has lifted the pretax earnings of the four banks by nearly $80 billion in the past 4 years. This includes banks’ 7% Q2 pretax income, same as was in Q1 but on a drop of 12% from last year’s second quarter.

Banking observers expect the practice ending before much longer owing to the infrequent credit quality improvements that aid in the banks’ cut back of bad-loan reserves. More reserves would need to be set-aside for new loans.

Various regional banks including Huntington Bancshares Inc. (HBAN) +4.30% and Comerica Inc. (CMA) +0.79% began re-building reserves gradually in second quarter.

Bank of America (NYSE:BAC) spokesman, Jerry Dubrowski stated that the $662million second quarter release of the bank was a rise from the first quarter’s $379 million, merited to improved credit quality. This improvement is fast enough to lead to an increase in Bank of America (NYSE:BAC)’s coverage ratio. The bank’s loan-loss reserves totaled its yearly charged-off loans times 3.67, which is an increase from 2.95 and 2.51 in the first and second quarter respectively.

Wells Fargo & Co. (NYSE:WFC), in their second quarter, released equal to their first quarter’s figure of $500 million. The bank stated in their earnings presentation that persistently strong credit quality is a proof of their reserve releases and the same is expected in the future.

The Citigroup Inc.(NYSE:C) release dropped from $646 million in their first quarter to nearly $610 million. J.P. Morgan, on the other hand, released $476 million much above their first quarter’s release of $352 million.

The banks seem to have released a lot in reserves. Bad-loan reserves all over industry have fallen to 1.67% of the first quarter’s leases and loans which is the lowest since 2008’s first quarter, as suggested by figures from Federal Deposit Insurance Corp.

The OCC, Office of the Comptroller of the Currency has demonstrated concerns about reserve releases being unsustainable, thus hinting banks to be more careful. OCC spokesman, Bob Garsson stated that the agency acknowledges the improvement in credit quality and reserve levels which continue to be at or over the long-term averages but if loan volume increases notably then this could lead to drop in reserves or increase in reserves.