Saturday, August 28, 2010

Banks' Loan Loss Reserves

BW online has a commentary about how banks adjust their loan-loss estimates to manage earnings.
Last year the banks had an easy way to juice their profits. All they had to do was allocate a little less money to loan-loss reserves -- the money they set aside to cover bad debt. As the economy has improved and defaults have slowed, many decided they didn't need as much in reserve as they did in 2003, and presto, their earnings per share would rise a few cents.

Do a little digging, and the current numbers don't look so great. Detroit's Comerica Inc. (CMA ) had one of the largest drops in its loan-loss reserves relative to total assets, according to a study of large banks' fourth-quarter earnings done by SNL for BusinessWeek. Not only did Comerica fail to add money in the fourth quarter, it also extracted $21 million from the pot. That gave it an extra $98 million in income, or 57 cents a share, that it didn't have last year. The bank beat analysts' earnings estimates by 10 cents. Comerica Chief Credit Officer Dale Greene says muted loan growth, coupled with major improvement in credit quality, justify the move.

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