Within Bank of America’s disappointing first-quarter earnings was an unwelcome harbinger for the banking industry, the Wall Street Journal reports. BofA’s results were dragged down by huge additions to its loan-loss provision, an expense many other banks will also record soon. Given current credit conditions, many banks will have to increase their bad-loan reserves, dragging down their earnings.
All banks have money set aside against loan defaults. Putting more money into that reserve counts as an expense on the balance sheet, hurting earnings. Investors know all about loan-loss provisions, but they often underestimate their impact. Most were blindsided by the size of BofA’s big $6 billion provision, which far outstripped its $1.31 billion in trading losses.