You didn't hear that?
Exactly. The "noise" surrounding earnings season faded in the first quarter, and that may have said as much about how banks are shaking off the residue of the crisis as did the cuts in loan-loss provisions or the confident pronouncements of chief executives.
Largely gone were the one-time items such as asset writedowns, securities gains and other adjustments that have made it hard to assess banks' true health for two years.
Industry watchers were thankful for the better look at underlying performance and said the absence of one-time items was another indicator of industry improvement. But they stopped short of proclaiming a return to normalcy, where banks make money and are judged by how much they make.
"There is more noise to come, but the point bankers are trying to make is that these were honest-to-God core earnings that were coming in and that we have turned the corner in some areas," said Frank Barkocy, the director of research at Mendon Capital Advisors.
Executives at several big banking companies crowed that they could finally walk through a quarterly presentation without running through countless slides detailing one-time items.
John Gerspach, the chief financial officer of Citigroup Inc., characterized this quiet state as a sign of progress. For a while, special items tied to bailout-related costs, credit valuation adjustments related to credit spreads and gains on asset dispositions had made Citi's results tough to decipher.
"Last year in almost every quarter we felt that we were continuing to make progress that was somehow masked by a series of one-timers," Gerspach said during a quarterly media call last week. "With this quarter, a lot of the dust has settled and you're able to see a clearer picture as to how we've reshaped the firm."
Brian Moynihan, the chief executive at Bank of America Corp., also wanted outsiders to take note. "Compared to the past few quarters, this is one of the cleaner quarters," he said during the $2.3 trillion-asset company's quarterly call on April 16. Bank of America had "little equity sales, other significant items and little or no significant items such as legacy asset markdowns," he said.
There are a number of reasons for the quieter results. Though the operating environment for banking is far from returning to levels seen a few years ago, conditions are definitely more stable than they were in 2008 and 2009, and the numbers clearly reflected that.
Frederick Cannon, the chief equity strategist at KBW Inc.'s Keefe, Bruyette & Woods Inc., pointed to an improvement in the bond market, where spreads have "narrowed enough so you don't have big swings" in valuations. Such erratic changes had led big banks such as Citi and B of A — the latter largely because of its purchase of Merrill Lynch & Co. — to record a series of gains and losses to debt valuations throughout last year.
Citi's Gerspach noted this difference, and also pointed out that the source of many special items had disappeared now that the $2 trillion-asset company had taken the necessary steps to exit the Troubled Asset Relief Program.
Banks such as Citi, B of A and JPMorgan Chase & Co. that had been under the Tarp had incurred costs tied to preferred dividend payments, repayment of the government's investment or conversion of preferred shares to common stock to bolster tangible common equity levels. These moves added to special charges and other items.
Gerspach also noted that there may be fewer accounting adjustments as companies feel less pressure to sell assets to clean up their balance sheets or raise capital.
Barkocy said the calm shouldn't be viewed as a sign that banks are running out of levers to pull to boost earnings. Instead, it seemed that fewer moves were necessary as many external pressures eased in the period. "There are also very few securities gains, which are one-time in nature," he said. "So what we see [at the bottom line] could be sustainable for a greater amount of time."
The largest banks were not the only ones reporting more-stable results. Midsize companies such as Regions Financial Corp., SunTrust Banks Inc. and KeyCorp also had fewer moving parts than in prior quarters.
Cannon attributed some of the calmness to the yield curve, particularly because the long end of the curve remained "fairly stable" during the first quarter. "You didn't have as much movement in mortgage servicing rights," he said, which had led to significant fluctuations in the valuations of the rights for midsize banks given that many had been major mortgage lenders in recent years.
That said, no bank had a squeaky-clean quarter. For example, chargeoff and other credit-quality figures were harder to understand at some banks as they had to bring billions of dollars of receivables on to their balance sheets to comply with new accounting rules. But Cannon noted that, for the most part, banks were able to pull those assets on to the books without a lot of chaos and confusion.
Still, analysts and bankers alike cautioned that a fragile economy and nervous investors, along with looming reforms in Washington, could create more volatility — and thus special items — in coming quarters.
"I don't want to say it is a straight-line path continuing up from here on out," Gerspach said.
Barkocy also said it is conceivable that some noise will return as more midsize banks prepare to exit Tarp.
The relatively sterile nature of the first quarter was appreciated, he said, because it gave analysts a chance to re-evaluate their modeling, perhaps gaining a sneak peek at what "normalized earnings" might look like.
"You still have a lot of changes coming from regulators, so it is too early to say we've finally hit calm seas," he said. "I think we are within a quarter or two of moving beyond talk of normalized earnings and returning to a good old-fashioned model for 2011."