Inside Financial Services

Banks’ 1Q Earnings Will Likely Be Strong

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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.

What do you think? Let me know!

5 Responses to “Banks’ 1Q Earnings Will Likely Be Strong”

  1. Rick K

    I can not agree more with you. If you are having a bad year, the number one rule is take every possible loss and put it that quarter. Then the next quarter will be profitable not matter what you do or how bad the market is; you will make money. I work in turnarounds for a living. if you do not do that, you will never be able to turn the ship around.

  2. mopedman

    Gosh let’s hope so Tom and since you’re right about human nature let’s make a note to watch things very closely around 2027-2028.

  3. roubini

    1Q is gonna stink. Have you ever NOT been table-poundingly bullish on everything all the time? Are you Bill Miller in disguise?

  4. batwell

    Good retrospective analysis, BUT this kind of presumes that the “cycle” is over. At ground level, at least in the midwest, there remains a massive disparity between demand for real estate and supply. It isn’t really a question of “absorbtion”, because there is little if any demand for commercial real estate. At least here, the banks still have the borrower propped up in front of them hoping to get 80 cents on the dollar. The bid side is at 40 cents, so there is little movement except the downward pressure on rent. The regionals may be close to having their marks right, especially where the “new broom” has come in.

  5. Scott

    It stands to reason banks should do well…given they get their money from the fed discount window for no cost to little…and should someone qualify for a loan, well they operate typically pretty well at 2 points, albeit in a healthier times, they can manage their risk nicely with investments that are not always in the same line as what their practice should be (i.e. loans to businesses and individuals). A lot has been written off, oh since 9 quarters in a row…some more than other quarters…..All that gross profit God, I hope they don’t get a special tax break now…would that not be the frosting on the cake….

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