This column originally posted on RealMoney.com on Monday, March 16. For more information about subscribing to RealMoney , please click here.

Don't dismiss the bank stock rally over the past week, as the prospects for relatively strong first-quarter earnings results from Citigroup ( C), JPMorgan Chase ( JPM) and Bank of America ( BAC) are good.

CEOs at each of the three banks last week expressed optimism about their companies and the economy, boosting financial sector stocks and the Dow Jones Industrial Average. While there's always the risk of an idiotic statement from political quarters crushing the market on any given day, there are several short-term factors working in the favor of these banks.

A quick analysis of 2008 loan loss provisions by the largest U.S. bank holding companies shows that there's plenty of room for them to maneuver in their quest for improved first-quarter earnings. For Citigroup, JPMorgan and Bank of America, decisions to reduce quarterly provisions for loan loss reserves could be justified, since the companies reserved sufficiently to keep ahead of the pace of loan losses during 2008. This would boost earnings considerably.

In fact, there's potential not only for sequential improvement in quarterly earnings, but in year-over-year earnings growth, a comparison loved by investors and the business media.

Suggestions from Federal Reserve Chairman Ben Bernanke that mark-to-market accounting rules for banks should be reviewed also fed the market fire.

Wells Fargo ( WFC) is the only one of the big four national banks that has not been making happy talk of late. The company recently cut its quarterly dividend 85% to 5 cents a share, as its executives grumbled about restrictions of the government's bailout program.

Investors will need to brace for inevitable "sell the good news" reactions in late April and it's also important to remember that macroeconomic indicators may continue to slide, potentially putting all the bank stocks right back into the doldrums.

But for now, these big banks look like interesting short-term plays.

Building Reserves During 2008

Here's a snapshot of quarterly net income for the largest four holding companies during 2008:

Quarterly Net Income ($Mil)
Dec. 2008
Sep. 2008
June 2008
March 2008
Citigroup
-$17,263
-$2,815
-$2,495
-$5,111
JPMorgan Chase
$702
$527
$2,003
$2,373
Bank of America
-$1,789
$1,176
$3,410
$1,210
Wells Fargo
-$2,734
$1,637
$1,753
$1,999
Source: Consolidated Financial Statements for Bank Holding Companies (Fed. Reserve Y-9LP) via SNL Financial.

One of the underlying factors in the earnings performance was large provisions for loan loss reserves, which exceeded quarterly net loan charge-offs (actual loan losses) for all four of the largest holding companies through 2008:

Provisions for Loan Loss Reserves and Net Loan Charge-offs and ($Mil)
Dec. 2008
Sep. 2008
June 2008
March 2008
Provision for Loan Loss Reserves
Net Loan Charge-offs
Provision for Loan Loss Reserves
Net Loan Charge-offs
Provision for Loan Loss Reserves
Net Loan Charge-offs
Provision for Loan Loss Reserves
Net Loan Charge-offs
Citigroup
$12,171
$6,143
$8,732
$4,679
$7,020
$4,397
$5,751
$3,802
JPMorgan Chase
$7,434
$3,315
$5,760
$2,484
$3,624
$2,130
$4,419
$1,906
Bank of America
$8,662
$5,550
$6,420
$4,347
$5,841
$3,619
$5,999
$2,715
Wells Fargo
$7,908
$2,804
$2,475
$1,995
$3,080
$1,512
$2,029
$1,528
Source: Consolidated Financial Statements for Bank Holding Companies (Fed. Reserve Y-9LP) via SNL Financial.

Citigroup

In Citigroup's case, the $17.2 billion net loss in the fourth quarter included a $9.6 billion writedown of goodwill. Also contributing to Citi's fourth quarter net loss was a $12.2 billion provision for loan loss reserves -- almost double the company's net loan charge-offs for the quarter.

Of course, all of the large holding companies followed suit throughout 2008, setting aside much more in reserves than they charged-off each quarter, keeping well ahead of the pace of charge-offs as they anticipated more trouble ahead.

For the fourth quarter, Citi's annualized ratio of net charge-offs to average loans was 3.29%,while its ratio of loan loss reserves to total loans was 4.09% as of Dec. 31.

Since the company has kept ahead of its loan charge-off activity and has seen a considerable boost in its capital ratios from infusions via the Treasury's Troubled Assets Relief Program (TARP) it wouldn't be surprising to see the company reduce its provision for loan losses quite considerably for the first quarter.

Assuming no surprise writedowns, Citi could post its best earnings results since the third quarter of 2007. In an internal memo leaked a week ago, CEO Vikram Pandit said the company was profitable (before taxes, extraordinary items and provisions for loan losses) during the first two months of 2009. The optimism pushed Citi's shares up 38% on March 10. Shares were up a whopping 122% for the past week, closing at $2.33 on Monday.

JPMorgan Chase

JPMorgan's annualized ratio of net loan charge-offs to average loans for the fourth quarter was 1.72%, while its ratio of loan loss reserves to total loans was 3.04%. With the company's loan loss provision of $7.4 billion more than double its charge-off activity for the fourth quarter, it could easily lower its provision for the first quarter, while keeping well ahead of its loan charge-off ratio, barring a surprise spike in credit card losses.

JPMorgan CEO Jamie Dimon followed Pandit last Wednesday, expressing optimism about his company's future and the prospects for the U.S. economy. JPMorgan's shares closed at $23.09 Monday and were up 45% from the previous week.

Bank of America

We're not in any position to know what sort of writedowns Bank of America will report for the first quarter, following its Jan. 1 acquisition of Merrill Lynch.

The company's annualized net charge-off ratio for the fourth quarter was 2.30%, while the year-end ratio of loan loss reserves to total loans was 2.40%, not far ahead of the pace of charge-offs. Bank of America would seem to have less wiggle room to lower its quarterly provision for loan losses than the rest of the big four.

Then again, Bank of America and Merrill Lynch figured prominently in American International Group's ( AIG) counterparty payout list released Sunday, with Bank of America receiving $5.2 billion and Merrill receiving $6.8 billion from AIG, funded by the first $84 billion in emergency loans from the government. With so much more money being pumped into AIG during the first quarter, it's possible the combined Bank of America-Merrill can take another sip from the trough.

BofA CEO Ken Lewis on Thursday said his company would post profits of $50 billion for 2009 (again, before taxes, extraordinary items and loan loss provisions). Bank of America's shares were up 65% over the past week, closing at $6.18 Monday.

Wells Fargo

Unlike Citi, JPMorgan and Bank of America, Wells Fargo was "behind" its annualized pace of net charge-offs for the fourth quarter. The charge-off ratio was 2.55%, while loan loss reserves covered 2.36% of total loans as of Dec. 31. Even though the company set aside $7.9 billion for reserves during the fourth quarter, when it more-than-doubled its balance sheet from the Wachovia acquisition, Wells Fargo would appear to have much less room to lower its quarterly provision than the other three large holding companies.

CEO John Stumpf said when the company cut its dividend that the $25 billion TARP investment the government made was "generating a return for the U.S. taxpayer -- at significant cost to the company." He said Wells would repay the government at the "earliest practical date."

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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