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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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From: fmikehugo4/22/2008 11:56:25 AM
   of 110194
 
05:41 New threat: Loan losses for banks - WSJ

The Wall Street Journal reports analysts believe the costs of building bad-loan reserves could cause just as much pain - and for a lot more banks - as the multibillion dollar write-downs on toxic debt. as the economic downturn starts to bite, rising defaults are prompting banks to add larger sums to the reserves, a development that has hurt first-quarter earnings at some lenders.

Bank of America (BAC) is the most recent victim. The bank's Q1 earnings, reported Monday, were worse than expected because of a $6 bln addition to its loan-loss reserve. That expense dwarfed the bank's $1.31 bln of trading-related losses in the quarter -- an indication that reserve building is taking over from write-downs as the newest big threat to earnings.

To be sure, investors have been expecting bank earnings to get hit by bad-loan reserves. But, as Bank of America's Q1 numbers show, that expense can cause a lot more pain than the market anticipates. And, if defaults continue to rise, banks may have to make large, earnings-depleting additions to their reserves for several quarters. "It's a good thing that banks have started to reserve more," says Kevin Fitzsimmons, banks analyst at Sandler O'Neill & Partners. "The bad news is that they are going to need those reserves."
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