Banks continue to release parts of their bad-loan reserves as they gain more insight into how these loans will perform going forward. With loans performing better than expected, banks are able to lower the amount of cash they hold to cover bad loans.
Last quarter, the four big banks were able to release $1.1 billion, well above the $800 million they released in the first quarter. This was the 22nd quarter in a row that the big four were able to release some of their bad-loan reserves.
The other part of this, beyond more money to be returned to shareholders, is that loan performance continues to improve. With that you have the tailwinds of better credit quality driving earnings higher.
But at the same time, we have a catalyst in the anticipated interest rate hike that will further boost earnings. When the Federal Reserve does boost interest rates, banks will be able to collect more money on the loans they make.
Overall, less regulatory overhang and lower legal expenses will ultimately mean higher earnings, which should translate into higher dividends and buybacks.
True income seekers are able to look past superficial issues – like the part that big banks played in the financial crisis – and invest with a clear head. Doing so means that investors can capitalize on the growing income opportunity that lies among big banks.
This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.