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3 Reasons The ‘Too Big to Fail’ Banks Bounced Back

13 December 2012 in Trading Ideas

Political footballs aside, one would be hard-pressed to argue that the bailout of the nation’s banks isn’t finally beginning to pay off for shareholders who stuck with them since the financial crisis.

The Too Big To Fail motif is up 24.8% this year, as the company’s largest banks have seemingly pulled out of a years-long funk. Keeping in mind that just four banks – JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) — are responsible for nearly 40% of the industry’s profits, here are some nuggets from the latest quarterly banking profile by the FDIC that indicate how it’s happening:

1. Earnings and earnings quality have risen. As John Maxfield pointed out in an article on Tuesday for the Motley Fool, the banking industry’s profit for the third quarter totaled $37.6 billion, representing a six-year high and the 13th consecutive quarterly year-over-year increase. Unlike in the past, however, when falling loan loss provisions were helping earnings growth, industry profit in the recent third quarter was driven organically, with net income revenue – net interest income plus noninterest income – rising 3% year over year.

2. Credit quality is coming back. Better interest income isn’t meant to imply that improving loan performance isn’t still boosting the bottom lines of banks. Where the financial crisis saw billions of bad loans weighing down the balance sheet of banks, the trend appears to be falling. As Maxfield reported, industrywide loan loss provisions were still a huge $14.8 billion last quarter, but that was more than 20% below last year’s $18.6 billion.

3. We’re running out of failing banks. During the worst stretch of the financial crisis, less than 40% of all insured US banks were showing year-over-year quarterly income growth. At the same time, more than one-third of all banks were losing money. Four-and-a-half years later, about 60% of banks are showing positive income growth, while about 10% are losing money. Similarly, bank failures have declined. The worst two-quarter at the end of 2009 saw 95 banks fail. In the most recent two quarters, that number is just 27. In addition, fewer than 700 institutions currently occupy the FDIC’s “problem bank” list, the first time in three years it has fallen below that level.

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