Chart 1: Income before provisions for loan losses. The provision game is one way to "pad" earnings based on assumptions for future loan losses. By looking at income before provisions one gets a better sense of how profitable the banks are or in other words how well they can service provisions for loan losses. Notice the falling trend. In other words with flat to declining revenues and rising non interest expense the banks are simply generating less income.

JPM, WFC, C, BAC Pre Provisional Income

Chart 2: This one says it all. Below are the total reserves as a percent of loans and leases. In other words as provisions are reduced each quarter to help pad earnings, less is set aside for future losses. What makes this chart interesting is the right axis that shows the value of home prices over the same period. How can you reduce reserves while home prices keep falling and unemployment is rising?

JPM, WFC, C, BAC Total Loan Loss Reserve of Total Loans and Leases

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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