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Bank Losses Ease, but Earnings Struggle

Banks have gotten over the loan-loss hump, but it's questionable whether top-line growth will drive earnings in the near term.



) -- According to two reports this week, U.S. banks are mostly done with their loan losses, but it's unclear when their profits will be supported by more than releasing those loan-loss reserves.



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Investors Service report on Wednesday indicated that U.S. banks are about two-thirds of the way through their loan losses from the economic downturn. In a quarterly debt examination report on Wednesday, Moody's estimated that banks have recognized $476 billion of the $744 billion in charge-offs they will have to take through 2011.

The ratings agency said upcoming losses are "starting to look manageable," since banks have $213 billion in reserve against those upcoming losses. Banks have another $601 billion in "tangible common equity," which is the most absorbent type of capital for loan-losses.

"It is clear to us that bank asset quality issues are past the peak," said Moody's Senior Vice President Craig Emrick, the lead author of the report.

Yet a report by Standard & Poor's Ratings Services the same day was critical of banks' second quarter results, saying "earnings increased in quantity but not quality." S&P attributed the profit gains to loan-loss reserve releasing, not to top-line growth. The ratings agency said it was "cautious" about its raised profit outlook going forward.

"The economic recovery remains fragile and the loss recognition in some asset classes uncertain," said Standard & Poor's credit analyst Rodrigo Quintanilla.

The Moody's report noted that charge-off and delinquency rates have gotten better over the past few quarters. The trend has been driven by improvements in residential real-estate and credit-card portfolios. Those trends were evident in reports from

Bank of America

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JPMorgan Chase

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Wells Fargo

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, whose credit statistics have improved markedly and whose mortgage operations went from loss-leaders to profit-drivers.

Moody's indicated that, the bigger the bank, the more they have progressed along the loan-loss spectrum.

Those "Big 4 Banks" are more than 67% of the way through their charge-offs, while other large banks that went through the stress tests are 61% through. Other, smaller banks that Moody's rates have just gotten past the half-way mark.

Still, with new worries about the broader economy - sparked by a high jobless rate and weak home sales - Moody's was cautious about its expectations of an ongoing recovery.

"Despite the improvement in residential mortgages the recovery in home prices remains feeble and there is considerable risk that these trends could turn negative again," said the report. "In regards to credit cards, the downward trend appears more secure, absent a double dip recession."

--Written by

Lauren Tara LaCapra

in New York.

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