JAN 25, 2013 4:26pm ET

Asset Quality of Top U.S. Banks Expected to Plateau in 2013

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A trend of sequential increases in credit-risk-related provision expenses by the largest U.S. banks reported in the fourth quarter will likely continue through 2013, according to Fitch Ratings, and is bound to lead to a plateau in their asset quality “consistent with stabilizing credit quality.”

Analysts expect improvements in the asset quality of these banks will wane over the next quarters as lenders change their provision levels and lower reserve releases.

Fitch maintains that loss provision increases reported by some banks during the fourth quarter of 2012 indicate “a trend of continuous provision declines since the peak of the credit crisis.”

Fitch’s quarterly review of commercial banks shows only KeyCorp, JPMorgan Chase, SunTrust and US Bancorp reported declines in provision expenses quarter-over-quarter.

JPM Chase provisions declined by 63% due to “a large decline in net charge-offs” while the bank’s reserve releases “were essentially flat quarter-over-quarter.”

Such drops in the ratio of reserves to loans, including mortgage loans, that are seen in many other banks, analysts wrote, have brought loan reserve to charge off ratios “to a level more consistent with stabilizing credit quality” that is expected to bring to an end reserve releases for U.S. commercial banks in the near future.

Yet, at least one of the nation’s top banks is being more cautious.

Counter to expectations Citigroup reported “a relatively modest reserve release in 4Q12.” Analysts see Citi’s conservative release approach as positive and agree with Citi executives who argue that the housing recovery still is fragile.

Such changes are likely to become “common features of banks' financial results” in 2013.

Fitch reports the average ratio of roughly 2.4% that was acceptable during these past years when most banks were dealing with credit risk and mortgage loan default issues has been gradually changing and “is now approaching an expected normalized level” that ranges between 1.5% and 2%.

While the ratio may differ depending on the risk profile of individual banks, analysts argue, the trend suggests that “room for additional reserve releases in 2013 is dwindling.”

Four years after the worst phase of the credit crisis, Fitch said, “the industry asset quality is likely reaching a plateau in 2013.”

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