Guest Post: Summarizing Bank Earnings With Two Charts

Submitted by Tony Pallotta

Summarizing Bank Earnings With Two Charts

Now that the big banks have reported below are two charts that sum up how they are doing aside from the noise of "beating expectations."

Chart 1: Income before provisions for loan losses. The provision game is one way to "pad" earnings based on assumptions for future loan losses. By looking at income before provisions one gets a better sense of how profitable the banks are or in other words how well they can service provisions for loan losses. Notice the falling trend. In other words with flat to declining revenues and rising non interest expense the banks are simply generating less income.

Chart 2: This one says it all. Below are the total reserves as a percent of loans and leases. In other words as provisions are reduced each quarter to help pad earnings, less is set aside for future losses. What makes this chart interesting is the right axis that shows the value of home prices over the same period. How can you reduce reserves while home prices keep falling and unemployment is rising?