Banks’ profits may include reserves — but that may be a good thing
As banks start to report their earnings for the year, some analysts may warn that the numbers a bit inflated because the banks are counting the reserves they set aside before the meltdown. But counting those reserves now isn't really being untruthful, report Bob Moon.
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JEREMY HOBSON: JP Morgan has just announced it earned more than $17 billion last year. That’s up almost 50 percent from the year before.
Looks good on paper, but as our Senior Business Correspondent Bob Moon tells us bank earnings aren’t always as they appear.
Bob Moon: At the height of the financial meltdown, banks were required to set aside huge reserves to cover expected losses from their bad loans. Now, those banks can dip back into those funds and pump up their bottom line.
Chris Kotowski is a banking industry analyst with Oppenheimer. He says it’s true banks can use the cash reserves to inflate their earnings, but he argues the flip side of the same accounting rule made things look worse going into the crisis.
Chris Kotowski: It really penalized earnings a whole bunch back in 2008, you know, when everyone was freaking out, to the tune of almost $60 billion, and then this year you put ’em back.
Kotowski says you can argue that this kind of reserve accounting distorts what’s reported as earnings. But he points out it’s also a positive indicator in itself that banks are able to dip into those funds now that they’ve weathered the storm.
Kotwoski: It’s happening because credit quality is improving.
Kotowski says not only are loan losses leveling out, but there are signs banks will finally start seeing loan-revenue growth in the coming year.
I’m Bob Moon for Marketplace.