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Big banks are back as JPMorgan, Citigroup turn corner on crisis

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Bloomberg San Francisco

Main Street teamed up with Wall Street to produce something the four biggest US lenders haven’t had since the banking crisis began two years ago: reason for optimism.

Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co, beneficiaries of $140 billion in taxpayer funds, reduced loan-loss provision expenses from last quarter and said the bottom of the credit cycle was past. Their investment-banking arms capitalised on fixed-income trading, leading to combined first-quarter profits of $13.4 billion, the most since the second quarter of 2007 before the crisis began. Citigroup reduced reserves for the first time since 2006.

 

“This quarter is confirmation that credit has turned a corner,” said Charles Peabody, an analyst at New York-based Portales Partners LLC who assigns “buy” ratings to Bank of America and JPMorgan, and a “hold” to Citigroup. Peabody doesn’t cover Wells Fargo. “You’ve heard every CEO say credit has turned, and there is nothing to be gained for them by being overly optimistic.”

Brian T. Moynihan, Bank of America’s chief executive officer, said April 16 that “the worst of the credit cycle is clearly behind us” and that economic growth is “real.” JPMorgan CEO Jamie Dimon said the economy may be poised for a “strong recovery.”

It was only 11 months ago that the Federal Reserve concluded that 19 US banks might have to raise $600 billion under “more adverse” economic conditions. Standard & Poor’s forecast at the time that the banking crisis could last until 2013. The four biggest banks have since repaid most or all of the US bailout funds.

While smaller US lenders keep failing, pushing the Federal Deposit Insurance Corp’s list of “problem” banks to a 17-year high, the largest are getting a lift from economic growth that’s helping consumers and businesses stay current on loan payments.

The economy grew across most of the US in March as consumer spending and manufacturing orders rose, the Fed said on April 14. The US expanded at a 5.6 percent annual rate in the final quarter of 2009, the fastest economic growth in six years.

At least 11 stock-market analysts increased their target prices for New York-based JPMorgan and Bank of America in Charlotte, North Carolina, after the banks reported quarterly earnings this month. Eight boosted their targets for Citigroup, whose CEO, Vikram Pandit, said on April 20 that he felt “a whole lot better” than he did a year ago and maintained that the bank is “positioned for growth.”

Analysts have focused on the trend in provisions for loan losses as a clearer indicator of future bank profits than quarterly earnings. Reducing the provision signals confidence that credit charges will lessen.

Bank of America reported provisions of $9.8 billion, down $305 million from the fourth quarter, as most consumer and commercial loan losses declined. JPMorgan reduced provisions by $274 million overall and cut reserves in its card-services unit by $1 billion, according to the April 14 statement. Wells Fargo, based in San Francisco, trimmed provisions by $583 million, and Citigroup cut them as well, if an accounting rule change is applied retroactively.

“Stabilisation in jobless claims and stabilisation in unemployment are reducing the need to build reserves,” Morgan Stanley bank analyst Betsy Graseck said in an interview.

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First Published: Apr 27 2010 | 12:06 AM IST

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