More US banks booked negative provisions for loan losses in Q4'20

Several large and midsize U.S. banks boosted earnings in the fourth quarter of 2020 by booking a negative provision for credit losses amid an improved economic outlook.

Most banks built massive loan loss reserves at the onset of the pandemic in early 2020, and some are now seeing enough positivity to release some of those reserves. Among 92 banks with at least $10 billion in assets and with available data, 32 recorded a negative provisioning figure in the 2020 fourth quarter, up from six banks in the 2020 third quarter. A negative provisioning line item in earnings generally causes banks to release loan loss reserves, providing an earnings tailwind.

JPMorgan Chase & Co. was among those that reported a negative provision during the quarter, with a net benefit of $1.89 billion. A few other big banks also recorded negative provisions, such as Wells Fargo & Co., Citigroup Inc. and PNC Financial Services Group Inc.

Like other lenders across the country, those banks had bulked up their loan loss reserves in the first half of the year. But banks' credit quality has held up even as the pandemic persists. The outlook for the economy has improved as well, prompting some banks to begin releasing reserves. Large, public banks recently adopted the current expected credit loss, or CECL, accounting standard, which relies heavily on the economic outlook to model loan loss reserves.

A handful of banks were able to release reserves through negative provisioning as early as the third quarter of 2020, such as Fifth Third Bancorp, Trustmark Corp., Hilltop Holdings Inc., Boston Private Financial Holdings Inc. and SVB Financial Group.

Those lenders mostly continued with negative provisions during the fourth quarter of 2020, with SVB Financial reporting a benefit of $38.4 million. A significant driver was the improved economic outlook from Moody's, which the bank uses in modeling loan loss reserves, said Chief Credit Officer Marc Cadieux during an earnings call.

Several regional banks reported negative provisions for the first time in the fourth quarter of 2020, including Zions Bancorp. NA, Comerica Inc., Regions Financial Corp. and Western Alliance Bancorp.

While most banks continued setting aside limited amounts of reserves, provisioning was "down sharply" across the board as the economic outlook improved and credit metrics largely stayed positive, Jennifer Demba, an analyst at Truist Securities, wrote in a note to clients.

Bank leaders still see hotels and restaurants as the most stressed borrowers, with many requiring a continuation of deferral agreements or new structured solutions to keep them afloat. But loan charge-offs have remained contained, and the likelihood of a continued decline in provisions should lead to more capital distributions to shareholders after a 2020 that limited capital return plans, Demba wrote.