ALLL Trends Due To CECL Implementation and COVID-19

The largest U.S. banks reported weak first-quarter 2020 earnings, with a median decline of 33%, a trend expected to continue at least into the second quarter and possibly beyond, according to a May 2020 report from S&P Global. This was largely due to buildups in ALLL based on downtrends in economic predictions and adoption of CECL accounting methods, coupled with fewer net charge-offs.

 

% Bank of America Capital One Citigroup JP Morgan PNC US Bankcorp Wells Fargo
Provisions 372.3 222.0 261.5 455.3 383.6 163.4 374
Reserves to Loans 1.09 5.22 2.89 2.29 1.48 1.92 1.49

 

Some notable commentary on ALLL impact on large banks’ Q1 2020 earnings:

  • Bank of America Corp.'s first-quarter earnings were hurt by an outsized credit provision because of the economic fallout from the COVID-19 pandemic; loan balances were up 11% as a result of sizable drawdowns on commercial commitments.
  • Capital One Financial Corp. posted a quarterly loss of $1.3 billion, primarily because of a $3.6 billion loan loss reserve build reflecting the expected economic fallout from the COVID-19 pandemic, as well as credit deterioration in its oil and gas portfolio. The largest portion of the reserve build was attributed to the card portfolio.
  • Citigroup Inc. reported a 46% drop in first-quarter earnings from the prior year as its allowance for loan losses went up by about 70%, with the allowance equating to 2.9% of loans at the end of the quarter.
  • JPMorgan Chase & Co. reported a nearly 70% decline in first-quarter earnings, mostly because its provision for credit losses rose by more than 4.5x, triggered by the coronavirus pandemic. With that provision and the day one CECL impact, the company increased its allowance for credit losses by 77% from year-end 2019, in particular because of credit card and wholesale lending.
  • PNC Financial Group Inc.'s first-quarter results were hurt by a large reserve build, similar to its regional bank peers. Net earnings, excluding the $693 million reserve build, were fairly stable, and asset quality remained stable, although we expect deterioration for the remainder of the year.
  • Wells Fargo reported a sizable reserve build of $3.1 billion during the quarter, and we expect further provisioning in 2020.
 

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