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1 Powerful Trend to Capture in the Banking Industry

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There are some clear trends to be observed in the results of banks ranging from the trillion-dollar Citigroup to pint-sized regional banks such as BankAtlantic Bancorp (NYSE: BBX  ) . Fools should absolutely pay attention.

Coming back strong
While the U.S. economy is still building a slow sense of momentum, American banks, with some clear-cut encouraging trends, already seem to be on the right track. And the most apparent one has been a decline in provisions for loan losses (PLL).

As I observed in my study of the banks' recent earnings, a whole bunch of banks have experienced a significant improvement in their credit portfolios, which subsequently led to an improvement in their first-quarter earnings. Allowance for loan loss has shown an improving trend in the last couple of years but gained impetus in this quarter.

The behemoths
Big banks have led the way in this trend. Citigroup's provision for loan losses has been declining steadily over the last few quarters. It declined to $2.9 billion this quarter, compared with $8.4 billion in the first quarter of 2010 and $4.6 billion in the preceding quarter -- significant improvements in credit quality across consumer and commercial portfolios.

Similarly, Bank of America (NYSE: BAC  ) managed to pull off a quarterly profit after posting losses for two consecutive quarters as its provision for loan losses went down to $3.8 billion from $9.8 billion in the year-ago quarter. JPMorgan (NYSE: JPM  ) also saw a drop in its consumer net charge-off and nonperforming assets.

The regional banks
The larger trend has not been restricted to big banks. Apart from improvement in their asset and credit quality, regional banks such as KeyCorp and BankAtlantic Bancorp also experienced lower credit costs. Even regional banks incurring net losses in the quarter also managed to join the group. Flagstar Bancorp and Hudson City Bancorp (Nasdaq: HCBK  ) posted net losses, but low market interest rates fueled loan repayments, thereby resulting in an improvement in PLL.

Not just America
Interestingly, it wasn't only American financials that have benefited from a cutback in PLL. Declining provisions for credit losses and a goodwill impairment charge last year enabled Canadian banks such as Royal Bank of Canada (NYSE: RY  ) and Bank of Montreal (NYSE: BMO  ) to fall in line as well. In fact, the trend was observed in European countries, too. Spanish giant Banco Santander (NYSE: STD  ) and the U.K.'s biggest bank, HSBC, also benefited from lower provisions and loan losses.

The Foolish bottom line
An upsetting trend observed during the quarter was the bleakish domestic loan growth, and this may become a bottleneck in the lending business in the United States. But on the whole, things are improving for the banking industry, which was battered and bruised during the economic fiasco. I see this trend continuing and improving in the forthcoming quarters, complemented by the gradually reviving larger economy. Fools may wish to consider investing in well-run banks.

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Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of Bank of America and also holds a short position in the stock in a different portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (23)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 17, 2011, at 2:03 PM, Gonzhouse wrote:

    When you say "things are improving for the banking industry" and reference PLL, it's all relative to what is being reported. The banks are still whistling past the graveyard; they have not recognized the full extent of residential real estate problems and we haven't even hit the commercial real estate problems yet.

    I do agree that the only banks worth discussing are Canadian banks, who did not get hung up in the US mortgage mess.

  • Report this Comment On May 18, 2011, at 12:51 PM, Brent2223 wrote:

    Loan loss reserves, probably the biggest reason to look at cash flows and not p&l. These are pure accounting guesses on future performance, and usually the biggest tool used to manipulate reported earnings. Step 1, determine what earnings you'd like to report. Step 2, determine the loan loss adjustment to book to get to those earnings.

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