I don't see a slow decline in chargeoffs. I see a very substantial decline and a much faster decline in the bad loan provisioning:
1. Commercial Loan Delinquencies - 30 to 89 days - At 12/31/10 dropped by 41% from prior quarter. Represents the lowest level since 2007. Sets the stage for significantly lower defaults in 1st qtr. Commercial loans include adc, other cre and c&i loans which in 2010 accounted for around 60% of charge-offs.
2. ADC Loans - Amounted to 5% of loans and 25% of losses or 60 bsp in 2010. Anticipate huge improvement in 2010. 12/31/10 adc book balance amounted to $3397 million and included $172 million of charge-offs. Allocated adc bad loan reserve at year end was $469 million. Assuming a loss severity rate of 60%, the bank can absorb $1 billion of bad loans without incurring any additional chargeoffs in 2011.
Management has stated that the "right size" of the adc portfolio is $2 to $3 billion. At $2.5 billion, the midpoint, little if any additional chargeoffs would be required in 2011. The adc loan portfolio is down 62% from its peak so we're almost at the bottom of the barrel.
Additionally, bad adc loans are down big in florida and georgia, states with the biggest loss severity rates in 2010. At 12/31/10, 51% of the adc defaults are now in north carolina and virgina, 2 states with the lowest loss severity rates.
The 2011 adc loss severity rate thus, could be substantially lower than the assumed 60% due to the favorable mix shift.
I think you can kiss off additional charges incurred via valuation allowance in other expense.
3. Other Cre - Commercial land loans, big driver of other cre losses are down 1/3 in last year so chargeoffs will drop substantially in 2011. Defaults on incoming producing properties are stable and loss severites are manageable. Expect 2011 chargeoffs to drop by 50% or $200 million or 20 bsp.
4. Residential Mortgages - At 12/31/10, prime mortgages make up 82% of portfolio vs. 74% at 12/31/09. Defaults and loss severities are much lower for prime vs. alt a and subprime. Alt A and subprime mortgages loans are down by about 25% in last year. Prime defaults and loss severities in the 4th qtr of 2010 improved substantially vs. the start of 2010.
5. Direct Retail - Lot loans are down by 25% at 12/31/10 and generated about $100 million in losses in 2010. Should drop big in 2011. Equity lines and loans are stable with losses in the 1.5% range which is still around 4 times higher than normalized losses.
6. Specialized Lending - Vs. history, losses in 2010 were around 30% lower. Nice performance particularly when losses are evaluated against net interest income.
7. Auto Sales - Losses in 2010 - 50 to 60 bsp.
8. C&I - Appears losses have been running around $100 million qtr. Likely to improve as economy picks up. Allocated reserve represents around 6 quarters of losses.
9. Revolving Credit - Losses are in the 400 bsp range, about half of jpm rate. Expect some improvement.
I'm sticking with my forecast for 2011 found on investor village.