Loan Loss Provisions: How Banks are Navigating the Crisis
Banks put aside enormous allowances for loan losses in the first half of the year as they expected elevated borrower defaults during the economic downturn. But there are questions about whether the losses will exceed those allowances, or how this might weigh on profitability.
Published: October 5, 2020
U.S. Bank Losses
With the economic downturn caused by the coronavirus pandemic, U.S. banks have had to prepare for the likelihood of elevated borrower defaults and have more than doubled their allowances for loan losses. This, on the back of about $115 billion of provisions in the first half of 2020, represented major progress toward absorbing the loan losses likely to result from the economic downturn.
Still, while the pace of provisioning may slow, S&P Global Ratings believes U.S. banks in aggregate are far from done with provisioning for pandemic-related losses.
In trading results, Wall Street's big banks find some relief from tumultuous Q2
For Wall Street's biggest banks, 2020 is shaping up to be a heyday for trading. JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. all saw double-digit spikes in trading revenues during the second quarter as financial markets around the world reacted to the continued fallout from the COVID-19 pandemic.
Read the Full ArticleU.S. Loan Loss Reserves Approach Great Financial Crisis Levels
Banks' loan loss reserves approached Great Financial Crisis levels in the second quarter, but analysts are hopeful that the recent drop in deferral rates will enable a similar decline in provisioning. During the second quarter, the banking industry, in aggregate, had loan loss reserves totaling $242.79 billion, only slightly behind the Great Financial Crisis' peak of $263.11 billion in the 2010 first quarter.
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Even as signs of normalization from the coronavirus-caused economic downturn sprout across countries, the pandemic is pressuring global banking sectors as they balance declining asset quality & creditworthiness with increasing demand for lending.
READ MORE ON THIS TOPICThe Nordic Countries
Oil-related exposures have been causing problems for Nordic banks since the coronavirus crisis broke out, but second-quarter financial results indicate that the region's lenders have otherwise avoided the worst impact of the pandemic.
Analysts also point to Nordic banks as the best placed to resume a normalized dividend policy.
Deposits at Sweden's Top Banks Jump as Clients Off-Load Assets, Draw Down Loans
Customer deposits at Sweden's largest banks increased sharply in the first quarter, which their finance chiefs said was attributable to financial asset sell-offs, risk reduction and drawdowns on liquidity facilities amid the coronavirus crisis.
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EMEA Banks
Most of Europe's largest banks posted higher core capital ratios in the second quarter, strengthening their ability to mitigate the negative effects of the coronavirus pandemic, S&P Global Market Intelligence data shows.
Nevertheless, the recent resurgence of COVID-19 infections across the continent has cast a cloud over the prospects for an economic recovery and banks' credit losses, analysts said. "Currently, banks are very well capitalized but there is a great level of uncertainty about how asset quality will evolve in the future," John Cronin, financials analyst at Goodbody Stockbrokers, said in an interview.
UK Banks' COVID-19 Loan Losses Likely to be Under £80B, says BoE
The Bank of England has revised downwards its estimate of future COVID-19-connected losses for U.K. banks, saying their capital buffers are robust enough to allow them to keep lending to the real economy.
The BoE revised its future aggregate loss estimate to "somewhat less than £80 billion" on the back of more-benign GDP predictions from its monetary policy committee.
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Mid-sized and small Chinese banks set aside more cash as loan loss provisions than they earned as net profit in the first half of 2020, highlighting a rising default risk for locally focused and less-capitalized lenders despite a recovering economy, analysts say.
For the six months ended June 30, the combined loan impairment losses of 20 mid-sized and small Chinese commercial banks listed in Hong Kong totaled 67.82 billion yuan, 42% more than their combined net profit of 47.74 billion yuan, according to calculations by S&P Global Market Intelligence. In the same period last year, these lenders set aside 58.41 billion yuan as buffer against expected loan losses, 19% more than their combined earnings of 49.26 billion yuan.
Japan's Regional Bank Profits may Sink Deeper as Loan-Loss Provisions Surge
Smaller regional banks in Japan are likely to report the lowest earnings in at least eight years in the current fiscal year ending March 2021, analysts say, after community and rural lenders more than doubled their loan-loss provisions in the fiscal first quarter as COVID-19 was added to their growing list of challenges.
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Outlook
For banks across the globe, S&P Global Ratings forecasts credit losses of about $2.1 trillion for 2020 and 2021 spurred by the pandemic, with $1.3 trillion this year--more than double the 2019 level. While around 60% of the forecast credit losses will arise in Asia-Pacific, the highest relative increases--more than double on average compared with 2019--will occur in North America and Western Europe.
The duration and severity of the global downturn and the strength of the recovery will shape bank asset quality, and key drivers and differentiators will be effective fiscal support from governments to their economies, as well as banks' forbearance measures and financial reporting transparency.
Non-Qualified Mortgage Loans Summertime Blues Continue Despite Improved July Delinquencies
The average 30-plus-day delinquency rate for U.S. non-qualified mortgage loans declined slightly month over month, though it remains elevated at 21% as of the July remittance reports. Loans with prior credit events and full income documentation exhibited less stress, while alternate documentation and DSCR loans showed the most.
Read the Full ArticleCiti Expects Credit Loss Reserve Build for Q3 on Outlook for Slow Recovery
Citigroup Inc. is likely to post another credit loss allowance build when it reports third-quarter earnings in October, CFO Mark Mason said. The bank's economic outlook has deteriorated and Citi now expects "a somewhat slower pace of economic recovery, particularly in the U.S., reflecting a slower pace of rehiring, less of a pickup in travel, etc.," Mason said during a conference presentation Sept. 14.
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