An "Encouraging Sign" or "Creative Accounting"?

Analysts put a different spin on the nation's largest banks releasing some of their provision for loan losses during the 2nd quarter.


Last week, JP Morgan and Bank of America kicked off the earnings seasons. Both institutions reported better-than-expected results but reviews have been mixed. Behind the gains was a move NPR called “creative accounting” while Reuters said it’s “another encouraging sign that the wounds inflicted by the financial and economic crisis are healing.”   JP Morgan reduced its loan loss reserve by $1.5 billion; BofA decreased their reserve by 17% from the first quarter.

Second quarter credit union results will start rolling in next week and we are looking to see if the positive improvement shown by credit unions in the first quarter continued. During Callahan’s 1Q Trendwatch Call, hosts Jon Jeffreys and Nick Connors discussed the improving asset quality at the nation’s credit unions as well as the continued climb of the coverage ratio. (Watch their discussion below)

The coverage ratio measures the allowance for loan losses as a percent of total delinquency. As an industry, credit unions’ coverage ratio grew to 89.8% at March 31st even though they reserved the smallest amount in seven quarters, just $1.89 billion. This compares to a coverage ratio of just 64.2% for FDIC-insured institutions at March 31st—the first time it actually increased since the credit crisis began. The release of reserves from the two largest banks seems to indicate that they believe the worst is over and the need for such a large provision account is starting to wind down. Stay tuned to see how credit unions are reacting to their local markets—2nd quarter data is expected by August…


July 19, 2010



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