Note the unusually wide gap between pretax earnings and pretax, pre-provision earnings. This is almost unprecedented. The last time it happened was 1934.

Pretax earnings in 2009 were 8.1% of the pretax, pre-provision earnings. The gap in absolute dollars is $229.6 billion dollars. The industry never earned $229.6 billion in pretax in its history. It only earned more than that amount once on a pretax, pre-provision basis. This was in 2009.

One might argue that the banking industry is at all time record earnings if one deducts the loan loss provision from the total pretax, pre-provision number. Moreover, the probability is actually quite high that the bulk of the loan loss provision will be deducted from the total. In the 10 year period from 1997 to 2006, the average loan loss provision for the industry was $29.9 billion. If one deducts this number from the pretax, pre-provision number recorded in 2009, it might be argued that the industry's pretax earnings are roughly $200 billion, an all-time record.

I believe strongly that this is the case. It is particularly true if the industry's recovery in non-interest income growth continues and the increases in non-interest expense costs remain muted. It should be noted that $200 billion in pretax earnings would be a tenfold increase from the $20 billion earned in 2009.

Stock Performance
The following few pages show the performance of the 11 stocks highlighted above in 1991 to 1999 compared to 2009 to the present. All prices have been adjusted to a beginning base number of 100 for the comparison. These charts make it evident that investors have reacted more quickly this cycle to the expected change in bank earnings. However, it is also evident that these stocks have not reached their potential.

Eoin Treacy's view The KBW Regional Banks Index broke upwards from its base earlier this month and had become somewhat overbought when it paused in the region of 55 last week. Some further consolidation is a possibility but a break of the yearlong progression of higher major reaction lows would be required to question scope for further medium-term upside.

The S&P500 Banks Index has held above the 200-day moving average since August and broke upwards from the 7-month range earlier this month. A sustained move back below the MA would be required to question potential for additional medium-term upside.

There remain considerable differences in the performance of various bank shares. Some remain in close proximity to their lows while others have retested their highs. Each share needs to be judged on its individual merits. Also see Comment of the Day on March 12th

Many investors remain scarred by their exposure to the banking sector during the 2008 decline and some institutions will take a significant amount to time to repair their balance sheets. The US economy has only begun to recover, the housing market remains fragile and unemployment remains high. Nevertheless, monetary conditions remain accommodative with an historically high yield curve spread. Banks less associated with the housing market or credit derivative losses remain at a competitive advantage evidenced by the outperformance of the regional banks and some investment banks. Those with sound global franchises, leveraged to global growth, particularly in Asia and Latin America are also garnering greater investor attention. The chart action indicates that the sector has bottomed and it is performing at least in line with the wider market which is a positive sign for the relative health of the cyclical bull market.