Credit concerns remain at bay as banks report lower-than-expected provisions

Many US banks reported lower provisions for credit losses than analysts expected even as higher-for-longer expectations raise questions about loan performance.

Of the 92 banks that disclosed first-quarter earnings through April 26, 67 posted provisions smaller than the consensus estimate, and 24 logged higher-than-estimated provisions, according to S&P Global Market Intelligence data. Also, of those banks, 56 booked smaller-than-expected net charge-offs (NCOs), and 35 recorded higher-than-estimated NCOs.

Credit trends have been normalizing, but there were no surprises in the first quarter, Piper Sandler analyst R. Scott Siefers said in an April 26 note covering his post-earnings thoughts on large regional banks. The analyst noted that customers have been resilient and known pressure points such as office loans are not markedly changing or creating concerns in other areas.

"What we are witnessing now is as good as we could hope to witness in a sustained higher-rate environment," Siefers said.

Problems tied to banks' office commercial real estate (CRE) exposure will remain a headline risk and result in NCOs. Still, Siefers expects reserves to stay around similar levels. "Our best guess is that total NCOs will degrade only a bit," Siefers said.

Credit loss expectations are currently manageable, though credit losses could accelerate if interest rates stay higher for longer, Truist Securities analyst Brandon King wrote in a May 3 note.

At $50B-plus banks

The Big Four US banks are among the institutions with first-quarter provisions lower than analysts estimated. Citigroup Inc.'s provision was the largest at $2.34 billion, $300.5 million lower than the consensus estimate.

JPMorgan Chase & Co.'s provision was the second-largest at $1.88 billion, $818.6 million lower than expected. JPMorgan's credit costs were driven by net charge-offs, which increased $825 million year over year mainly because of continued normalization in the company's card services business, CFO Jeremy Barnum said on an earnings call.

Barnum added that the lack of the reserve build in the first quarter was a function of normal seasonal patterns, and the company expects that to change as card loans grow. "We do expect build in the back half of the year," Barnum said.

– Download a template to compare a bank's financials with industry aggregate totals. – Download a template for a comprehensive profile on a selected bank or thrift. – View industry data for all US banks.

Bank of America Corp.'s provision was $1.32 billion, $44.3 million lower than expected. The company's provision expense included a $179 million reserve release because of "a modestly improved macro environmental outlook as the baseline consensus expectations improved from the fourth quarter," CFO Alastair Borthwick said on an earnings call.

BofA reported NCOs of $1.5 billion, $292.0 million higher than the consensus estimate and up $306 million from the previous quarter. The increase was "driven by continued credit card seasoning and commercial real estate office exposures, as swift revaluations from current appraisals and resolutions drove higher charge-offs," Borthwick said.

Some of the banks with over $50 billion in assets that reported higher-than-expected provisions are U.S. Bancorp, which reported an approximately 20% spike in nonperforming assets quarter over quarter as it faces continued stress in its office portfolio, and Valley National Bancorp, which built reserves as one of the steps it took to shield itself from CRE stress in the first quarter.

At $20B to $50B banks

Among 29 banks with assets between $20 billion and $50 billion, only seven booked higher provisions than the consensus estimate, including Bank OZK. The bank's provision was $42.9 million, $4.3 million higher than expected.

"Rates being higher for longer [is] certainly good [for] us from an earnings perspective and our trajectory of net interest income but could put some pressure on some of our borrowers ... which is why you continue to see the build that we had in the quarter," Bank OZK CFO Tim Hicks said on an earnings call.

At $10B to $20B banks

Eagle Bancorp Inc.'s provision was the biggest among banks with assets between $10 billion and $20 billion, at $35.6 million. The provision, which was $23.8 million higher than the consensus estimate, comprises the impact of updated valuation and an increase in the office allowance for credit losses coverage ratio, according to an earnings release.

Some banks within the group with lower-than-expected provisions are Puerto Rico-based banks First BanCorp. and OFG Bancorp. Five banks booked negative provisions, including merger partners Provident Financial Services Inc. and Lakeland Bancorp Inc.