Convalescents

22/10/2010 at 11:47 am 2 comments

In the UK this week, the news has been dominated by the austerity measures formalised in Wednesday’s Comprehensive Spending Review. In Europe, the French strikes against Sarkozy’s deficit reduction plan have been making headlines. So it has been easy to miss the subtle but important good news that has been emerging from the third quarter figures released by US banks.

On Monday, Citigroup posted results, reporting a healthy profit of $2.2bn for the quarter on the back of its exposure to growth in emerging markets and a reduction in the provision made for credit losses.

By itself this would not necessarily indicate anything, but results from its megabank peers suggest something of a pattern.

Tuesday saw Bank of America report results for the third quarter. Lacking Citi’s exposure to developing economies, and having to write down the value of its credit card business to reflect new rules on lending, it turned in a whopping loss. The situation would have been far worse, however, had the bank not made significant reductions to its provision for credit losses.

The very next day, Wells Fargo reported record Q3 profits that looked to have nothing in common with Bank of America’s results on the face of it – except that a key driver of the strong performance was a reduction in the provision made for credit losses. And to complete the picture for the Big Four, JP Morgan last Wednesday reported net profits that had grown strongly despite lower revenue because of a huge fall in its credit loss provision.

The consistency with which large American banks are revising down their expectations for credit losses is a bullish signal for the US economy. It underlines what has become a bit of a running theme for this blog: that although serious trouble spots remain, the world at large should be expected to heal itself over time.

And as the condition of the world’s banks improves from comatose to convalescent, we can expect all sorts of positive effects. The day after Citi reported, for instance, the US Treasury announced they were going to sell another block of shares. If completed at around the current market price this means that American taxpayers will have made a profit on their bailout, with the promise of more to come.

Let us hope that similar effects in Britain will outweigh the negative impact of our austerity drive, as planned.

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2 Comments

  • […] taken together with the US bank results we noted a month ago – which showed an across-the-board improvement in provisions for credit losses, […]

  • 2. In The Balance « The Blog @ Vigilant Financial  |  21/01/2011 at 3:15 pm

    […] as readers of this blog will know, this data is of a piece with reports on the mortgage market and results from US banks that suggest the worst of the subprime crisis is now behind […]

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