US banks' credit provisions fall despite credit quality deterioration outlook

Provisions for credit losses at US banks fell in the third quarter even as top bank executives predicted continued credit quality deterioration heading into 2024.

Amid elevated Federal Reserve interest rates and a slowing economy, credit quality concerns have intensified and began to rear their ugly heads through cracks in office and trucking industry portfolios during the third quarter. On earnings calls, bank executives said they anticipate credit quality metrics will continue to deteriorate as they move back to more normalized, pre-pandemic levels. Still, US banks only felt the need to grow reserves to loans modestly in the third quarter and accordingly recorded a sequential decline in provisions amid weak loan growth.

The industry posted aggregate provisions of $19.84 billion in the third quarter, a $2.48 billion decline from $22.31 billion in the previous quarter, according to S&P Global Market Intelligence data.

Twelve of the 20 largest banks reported quarter-over-quarter provision declines.

JPMorgan Chase & Co., the largest US bank by total assets, reported the largest quarter-over-quarter provision decline. The company cut its provision total by more than half to $1.48 billion in the third quarter from $3.29 billion in the previous quarter. The company was one of just three of the largest banks that reduced reserves as a percentage of gross loans sequentially.

"We continue to see the normalization story play out in consumer more or less exactly as expected. And then, of course, we are seeing a trickle of charge-offs coming through the office space," CFO Jeremy Barnum said during the company's third-quarter earnings presentation. "But the numbers are very small and more or less just the realization of the allowance that we've already built there."

Conversely, Bank of America Corp., the second-largest bank by total assets, posted the third-smallest sequential provision decline among the top 20 banks, with provisions totaling $1.26 billion compared to $1.30 billion in the previous quarter. Reserves as a percentage of gross loans increased to 1.26%.

The company's charge-off levels are still below where they were prior to the COVID-19 pandemic but are creeping closer to those more normal levels, CFO Alastair Borthwick said during the company's third-quarter earnings presentation.

Charge-off trends after that normalization point will depend on what happens in the broader economy, Borthwick said.

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U.S. Bancorp also decreased its provisions quarter over quarter despite an outlook for normalizing credit quality.

"Our expectation as we go into 2024 is that that normalization will continue. Delinquencies will continue to kind of move up and nonperforming assets will continue to move up," Chief Administration Officer Terrance Dolan said during the company's third-quarter earnings presentation. "But I think we're in a really good position in terms of the allowance coverage that we have, and we feel pretty good about that."

Like many banks, the company is keeping a close eye on its commercial real estate (CRE) office portfolio. Concern over that sector contributed to the company's quarter-over-quarter reserve increase.

"We have a reserve that's about 10% of the overall balance there. We have been increasing that, and we're likely to continue to increase that because that's going to be a pressure point," Dolan said.

Other banks with an outlook for continued credit stress raised both provisions and reserves, like First Citizens BancShares Inc. The bank's charge-off levels ticked up in the third quarter, primarily due to office CRE, small-ticket equipment leasing and investor-specific loans it acquired from SVB, executives said on the company's earnings call.

"We expect the charge-offs to remain elevated at least through the first half of next year," CFO Craig Nix said.

Total reserves climb again

Total reserves rose for the sixth consecutive quarter to $213.10 billion at the end of the third quarter from $209.04 billion in the linked quarter. Reserves as a percentage of total gross loans increased to 1.73% from 1.70%.

Similarly, all but three of the 20 largest banks boosted reserves as percentages of gross loans sequentially.