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Bank Profits Mask Peril Still Lurking
Citi Makes Money, but Defaults Still Climbing
Saturday, April 18, 2009

Citigroup announced a surprisingly strong first-quarter profit yesterday,
the latest bank to report a sharp improvement from the disastrous final
months of 2008.

The earnings bloom, however, is probably a false spring, according to bank
executives and financial analysts. Banks rise and fall with the economy. As
prosperity recedes, more people and companies are defaulting on loans. The
nation and its banks still face grave challenges, they said.

"We don't see the light at the end of the tunnel," Edward "Ned" Kelly,
Citigroup's chief financial officer, said in an interview, referring to the
state of the economy. His company, the most troubled of the large banks,
reported that defaults increased during the first quarter on nearly every
kind of consumer loan.

J.P. Morgan Chase also announced strong earnings this week. The company's
chief executive, Jamie Dimon, also did not see in those results evidence of
recovery.

Asked about loan losses in a call with analysts, he said: "Eventually they
will peak, but they've been going up consistently. We've shown you here
that they're going to go up even more. They're going to continue going up
in all the home lending areas, mortgage and home equity and credit cards."

Large banks have profited despite their problems because of accounting
maneuvers and earnings from investment banking.

The banking industry's bleak tone contrasts with recent expressions of
cautious optimism by President Obama and Federal Reserve Chairman Ben S.
Bernanke. The president said last week that he saw "glimmers of hope across
the economy," such as signs that spending on homes and consumer goods might
stop falling.

Bank executives are more downbeat, according to some analysts, because
banks are suffering more during this recession than other sectors as a
whole. This is unusual. It is a well-established industry rule of thumb,
for example, that the proportion of credit card loans in default roughly
equals that of Americans without jobs. But the collapse of the housing
bubble has destroyed vast amounts of wealth, pushing people to default on
other kinds of loans, including credit cards.

Lees verder: http://www.washingtonpost.com/wp-dyn/content/article/2009/04/17/AR2009041700969.html