In a boost to bank earnings, fewer consumer loans going bad

In an encouraging round of earnings reports, major banks say fewer mortgages are going bad, credit card defaults are down, and more people are paying the bills on time.

One of the nation’s largest consumer lenders, Wells Fargo, said yesterday that 29 percent fewer loans went bad in the last three months of 2010 than the year before. And late payments on loans considered likely to default declined for the first time since 2008.

Late payments on credit cards issued by Bank of America, JPMorgan Chase, and Citigroup also improved at a record pace at the end of last year, according to an analysis by Barclays Capital.

The reports are a sign that Americans are feeling more comfortable about their finances.

Personal spending powers about 70 percent of the US economy, and most economists say a fiscally fit consumer is critical to a strong economic recovery.

The holiday shopping season in 2010 was the strongest since 2006, and auto sales rose grew 11 percent last year, the first gains since 2005.

Taken together, the spending indicators are the “strongest showing for consumers since the peak years of the last expansion,’’ and signal that the economy is “near a threshold of self-sustaining growth,’’ analysts at Citi Investment Research & Analysis reported this month.

Economists and policy makers are waiting for signs that the economic recovery can power itself rather than rely on outside supports, like the Fed’s decision to buy hundreds of billions of dollars in government bonds to drive down interest rates.

The recent bank results are fueling that optimism.

Citigroup said loan losses fell 11 percent from the previous quarter as more of its customers kept up with payments.

It was the sixth straight quarter of declining losses, allowing the bank to release $2.3 billion from the reserves it sets aside for bad loans and helping it to report a profit.

JPMorgan and Wells Fargo have also reported bigger profits because they could release loan reserves.

But banks are still reluctant to loosen lending. Credit reporting agency Transunion estimates that 8 million Americans who had credit cards a year ago don’t have them now, either by choice or because they were cut off. Banks slashed credit lines and closed millions of credit card accounts in response to regulations passed after the financial crisis.

Individuals, too, are hesitant to borrow even when they have access to credit. Federal Reserve data show that total revolving debt held by US consumers — mainly credit cards — fell to just below $800 billion in November, the lowest since September 2004.

Each of the three biggest banks reported significant declines in card balances in the fourth quarter.