A banking recovery for big banks only?

09/08/2010 12:28 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Increasingly the U.S. banking story is a tale of two sectors.

For big banks, it’s the best of times. Well, at least, a very tasty recovery.

For small banks, it’s, if not the worst of times, still pretty grim.

And the discrepancy is still growing.

The 7,000 banks supervised by the Federal Deposit Insurance Corp. (FDIC) showed total profits of $21.6 billion in the second quarter. That’s a big improvement from the $4.4 billion loss in the second quarter of 2009.

Most of that swing came from the country’s big banks as they saw lower rates of bad loans reduce the money that they needed to put aside against loan defaults. In many cases, they didn’t just lower the rate at which they were putting aside those reserves against bad loans but actually reduced those set-asides. Reserves against bad loans fell by $11.8 billion in the quarter. That money got added back into profits for the quarter.

In contrast the number of banks on the FDIC’s list for institutions at risk of default climbed to 829 from 775. That’s the highest number of banks on the FDIC’s list since March 1993. And it looks like the new banks joining the list are relatively small. Total assets of the lenders on the list fell even while the number of banks on the list rose.

I think the percentage of profits going to the big banks is even likely to increase over the next few quarters.

According to an August 25 study by Moody’s (MCO) credit card losses are falling faster than expected. And with the credit card business dominated by a few large banks that means a big increase in profits at those banks as they reduce provisions for bad credit card loans. Moody’s figures that the six largest U.S. credit card issuers could earn $10 billion more in the 12 months beginning in July 2010 than it forecast back in March.

Historically U.S. credit card losses have tracked the unemployment rate. But not this time. Maybe because lending standards got so loose at banks during the credit boom that it’s been relatively easy for banks to improve their credit card portfolios. In any case, credit cards loans that were classified as bad debt are falling faster than the unemployment rate.

Here’s how Moody’s divides up that windfall: $2.7 billion for Citigroup (C), $2.6 billion for JPMorgan Chase (JPM), $2.5 billion for Bank of America (BAC), $931 million for Capital One (COF), $552 for American Express (AXP), and $658 million for Discover Financial Services (DFS).

However, there is one thing that unites big and small banks: They’re both cutting back on credit. And that’s not good for the economy as a whole no matter what wonderful things it may be doing for big bank bottom lines. Loans and leases from banks of all sizes fell by $96 billion, or 1%, in the second quarter, according to the FDIC.

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