MINNEAPOLIS — A year from now, the final three months of 2009 might be remembered as a watershed moment for the nation's banking industry.
Four of the nation's largest banks — U.S. Bancorp, Wells Fargo & Co., JPMorgan Chase and Bank of America Corp. —said this month that losses from troubled loans slowed in the fourth quarter, while delinquencies on consumer loans have stabilized.
Analysts say this marks the first time since the financial crisis began two years ago that credit quality appears to be improving for most of the nation's largest financial institutions — those deemed "too big to fail" by federal regulators.
This improvement has allowed major banks to reduce the amount of cash they set aside in loan-loss provisions to cover future losses. That, in turn, has fattened profits for some. On Wednesday, U.S. Bancorp reported a near-doubling of its fourth-quarter profit to $602 million, while Wells Fargo surprised Wall Street by turning a $2.8 billion profit, despite repaying $25 billion it owed the U.S. Treasury. JPMorgan, the nation's second-largest bank, said earlier that its fourth-quarter profit more than quadrupled to $3.28 billion. Bank of America, however, reported a $194 million loss.
Until the giant banks wrest themselves from the crushing weight of bad loans, they will be reluctant to loosen their purse strings and loan more to consumers and businesses, analysts say. The nation's largest banks account for a giant piece of the overall loan pie. The 10 U.S. banks with the largest loan portfolios represent about 40 percent of all lending by banks in the country, according to SNL Financial of Charlottesville, Va.
Stronger bank balance sheets also reduce the likelihood that these institutions will return to the public trough for more money after receiving — and largely repaying — hundreds of billions of dollars in taxpayer bailout funds. "We're finally turning the corner," said Jon Arfstrom, a bank analyst at RBC Capital Markets in Minneapolis. "This was a nasty recession, but the pace of growth in problem loans is slowing pretty much across the board for major banks."
Sounding unusually upbeat in a conference call, Wells Fargo CEO John Stumpf declared, "I believe our business is better in virtually every aspect." In the same call, Wells Fargo chief financial officer Howard Atkins said 30-day delinquencies had flattened or improved significantly in several business lines, including the bank's credit-card business.
Last fall, Wells Fargo said it expected losses on consumer loans to peak in the first half of 2010 and commercial losses to peak in the second half. Atkins said losses on the bank's consumer loans may already have peaked.
It was a similar story at U.S. Bancorp, with troubled loans still rising but at a much slower pace. The bank said its non-collectable loans rose 5 percent in the fourth quarter, versus 12 percent and 23 percent in the previous two quarters, respectively. The bank's writedowns on bad loans also moderated.
"We're getting very close to an inflection point," said Andrew Cecere, chief financial officer of U.S. Bancorp.
Yet, despite signs that credit quality is finally stabilizing, the economic recovery remains fragile, say analysts. The major banks insist that they are eager to make loans, but they are having difficulty finding willing borrowers.
Indeed, loan balances have fallen at many of the nation's largest banks over the past year. The drop has been particularly pronounced at Wells Fargo, where average total loan balances in the fourth quarter declined nearly $18 billion, or 2.2 percent, over the previous quarter.
Some congressional leaders have accused bankers of hoarding their money despite receiving billions of dollars in bailout money, and the Obama administration has publicly called on the banks to make more loans.
Cecere, the U.S. Bancorp chief financial officer, took issue with the suggestion that banks are being stingy with loans.
"We have 60,000 employees. That's why they come to work every day — to make loans," Cecere said.
Businesses, in particular, have been reluctant to borrow, Cecere said. U.S. Bancorp said its commercial customers, on average, have only tapped about 30 percent of their available credit lines, down from 32 percent in the third quarter and 38 percent a year ago. Overall, U.S. Bancorp's commercial loan portfolio has declined from $50 billion to $43 billion over the past year, the bank said.
However, Cecere predicted an uptick in loans as the recovery gains momentum.
"People will begin to invest in their companies again, and loan demand will increase," he said. "It's a function of the economic recovery and confidence."