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Well, it seems that the provision write back cycle is going soundly ahead as previously reported in the Writing Back the Down Up post back in October of 2010. JPM recently reported some fairly strong earnings, in large part thanks to the pick-up in provision write backs. That being said, it’s not all blue skies just yet. Top-line revenue is still pondering and awaiting a real pick-up, which is partly to be expected given the current economic situation.

New or improved revenue will be of increasing importance in the financial sector as, after all, these are the core earnings-sources that actually increase dividend yields and/or are reinvested in a sustainable manner within the company’s operations.

Also, more to the point to some of the more fundamentally attuned out there, as far as earnings per share estimates go, a one off write-back can be a bit of a throw-off. Analysts like predictability and the difficulty is now to see how the new capital structure will reflect into mid-term earnings returns or if it will add fluctuations to current estimates. Expect some diverging opinions to poke their noses out over the coming year.

Some Top-Line Equity

The good news though is that these provision write-backs are true, real, tangible and, more to the point, unencumbered capital. Instead of being dead weight upon a balance-sheet and the capital structure, they can now be put back to full use and earn real returns. Furthermore, expect further reduction on overall WACC for the entities concerned with improved capital structures de-risking the entities a little.

These write-backs have added to the asset base without requiring either new equity dilution nor leverage. Indeed, they might assist in reducing both depending on the overall strategy of the institutions concerned. Though it is by no means certain that this capital can translate immediately into further earnings (see warning above) there is value in being reasonably optimistic in simply estimating that (write-back)*R.O.E. might just be added through into following quarters.

On other fronts, there could be added, and less expected, benefits deriving from this flow-on: corporates may also follow the lead of the financial sector and redeploy capital into operations, lead-times over payables may be reduced and further liquidity may be brought into business and retail credit. However, even if this capital only gets returned back to equity holders, this should still give further upticks both to the benchmarks and overall savings/investor sentiment and consumer confidence. Here’s to being positive 🙂

PS. Oh, and without being too pesky here, it seems that the latest ISM readings over the past few months, consumer and business confidence measures have also followed over from some past review in 4 Fundamentals according to 24, but more about that in another post.

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