A consensus is emerging among industry watchers that banks will return to so-called normalized earnings by 2012, with loan losses finally easing to pre-recession levels.
JPMorgan Chase & Co. bolstered that view when it said last month that it saw clear signs of improvement in its troubled mortgage and credit card portfolios in the first quarter.
Mark Fitzgibbon, director of research at Sandler O'Neill & Partners LP, said JPMorgan Chase Chief Executive Jamie Dimon's positive commentary on the direction of the economy may have done more than reinforce the 2012 timetable.
"If anything, it pushed it up a little bit," Fitzgibbon tells US Banker, a Collections & Credit Risk sister publication. "They're kind of a bellwether for the industry.”
Chris Kotowski, a banking analyst with Oppenheimer & Co. Inc., agreed, saying a decline in loans at least 30 days past due across JPMorgan Chase's consumer portfolios bodes well for other banks.
"While JPM's earnings remain significantly impacted by the weak economic environment, [its] results increase our conviction that the company's and the industry's recovery is on track," Kotowski wrote in a recent research note. Kotowski is on board with the 2012 deadline. So are analysts with Keefe, Bruyette & Woods Inc., who said in a report in March that they expect more than half of the 175 banks they cover to reach normal earnings that year.
While analysts differ in their math for calculating when and why banks will get back to normal, their underlying rationale is similar for pegging the year as 2012: there is evidence that the amount of money banks have to set aside to cover bad loans has peaked.
Provisions have been falling at large and midsize banks, and chargeoffs appear to be peaking. If that trend holds, these banks could have the bulk of their bad loans cleared from their books within two years.
Loan losses have been historically high in the past couple of years: Banks had $186.8 billion in chargeoffs in 2009, according to Federal Deposit Insurance Corp. data.
That was up from $99.5 billion in 2008 and up from $26.7 billion in 2006, when things were considered still normal. Initial projections from early last year had banks getting back to normal in 2011. The deadline was pushed back in the fall as the unemployment rate kept rising, and it became clear that many had underestimated the severity of the downturn.
The 2012 deadline isn't written in stone, of course.
Jason Goldberg, an analyst with Barclays Capital, says banks could be further away from normal than they appear because of steps regulators are taking to help borrowers stay solvent.
Other analysts worry that regional banks are not being up front about potential losses in their commercial real estate books, which do not have to be marked to market.
David Dietze, chief investment strategist at Point View Financial Services Inc., says modifications are certainly buying time for banks and their borrowers. Whether they are delaying another round of losses depends on how well the economy recovers, he adds.
"Even if you are deferring the day of reckoning there is still a chance — and it actually looks more likely today — that a V-shaped recovery takes hold," Dietze says. "The reality may change in their favor by virtue of a rebound economy."