The four largest banks have reported earnings for the fourth quarter, and a review shows an interesting mix of opinion on the trend of credit quality and issue that is important to all investors. (If you're a number cruncher and responsibility doesn't scare you, a credit analyst could be the job for you. For more information, read Analyzing A Career In Credit Analysis.)

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For What it's Worth
Earnings conference calls should be viewed with a little skepticism, since managements typically use the occasion to espouse a positive view of the company and the operating environment that it is involved with. Despite this acknowledged wariness, the commentary can be incorporated into the investment process in conjunction with other sources of information.

Wells Fargo (NYSE:WFC) had stated previously that consumer credit losses would peak in the first half of 2010. During the call, management said that peak losses were tracking to that prediction better than expected, and may have already reached a peak.

"Based on the portfolio performance data we saw in the fourth quarter, and assuming the same economic outlook, we are actually tracking somewhat better than those projections. Credit losses in almost all of the consumer portfolios declined or stabilized in the fourth quarter." said Howard Atkins, the CFO of Wells Fargo.
Bank of America (NYSE:BAC) also weighed in on the issue of credit losses during its quarterly call. Brian T. Moynihan, the new CEO of Bank of America, said, "Credit quality appears to be stabilizing, if not improving. Net credit losses in dollar terms decreased $1.6 billion from the third quarter of 2009, supporting our comments in October that overall credit costs were peaking."

Citigroup (NYSE:C) saw a mixed picture in credit quality during the fourth quarter, with continued problems with the U.S. consumer, but a marked improvement on the corporate lending side. The bank saw corporate credit losses of $819 million in the quarter, down 44% sequentially. Management attributed the decline to "stabilization in credit quality across most segments of our corporate loan portfolio."

On the Consumer lending side, Citigroup is seeing improving trends in its international lending portfolio, but further problems in North America. John Gerspach, the CFO of Citigroup said, "Across our major North America consumer credit portfolios we expect a modest increase in net credit losses in the first quarter of 2010, after which we may see some slight improvement. However, the outcome for the second half of 2010 will largely depend on the economy."

JP Morgan (NYSE:JPM) also saw problems with the Consumer portfolio in the fourth quarter. The bank added $1.9 billion to the consumer loan loss reserve, bringing its total to $32.5 billion, or 5.5% of all loans.

The Bottom Line
Credit quality seems to be stabilizing or even starting to improve, as some banks were optimistic after examining fourth-quarter trends in various businesses. However, any double dip in the economy will send the consumer right back into a freefall, and no doubt making investors flee to the sidelines again. (To learn about how corporate credit can effect your investments, check out What Is A Corporate Credit Rating?)

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