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Big 4 US banks add $28B to credit loss allowance, analysts see more coming


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Big 4 US banks add $28B to credit loss allowance, analysts see more coming

The four largest U.S. banks have increased their allowance for credit losses by $28.1 billion since year-end 2019, but analysts think there will be more to come.

Uncertainty from an unparalleled, pandemic-induced economic shutdown was a recurring theme in bank earnings this week. While multibillion dollar reserve builds dragged results, it was an open question if the reserves would be sufficient to cover losses.

America's largest bank reported the largest build. JPMorgan Chase & Co. increased reserves by $4.3 billion to adopt the current expected credit loss standard, or CECL, at Jan. 1, and then added $6.8 billion of reserves in the first quarter due to the deteriorating economic forecast as COVID-19 triggered widespread shelter-in-place orders. The first-quarter reserve build figure did not include $1.5 billion of provisioning to cover net charge-offs, meaning the bank's allowance for credit losses increased a full $11.1 billion in three months.

At the other end of the spectrum, Wells Fargo & Co. reported the smallest increase among the mega-banks. Its $3.1 billion reserve ramp-up in the first quarter was offset by a $1.3 billion release to adopt CECL.

Analysts at Jefferies LLC foresee greater provisioning in the quarters ahead for both banks.

"Reserve builds were sizeable for each, but are unlikely to have covered the extent of the required builds for the cycle, in our view," analysts wrote.

Wells Fargo's reserving brought questions on the bank's April 14 earnings call about whether the company had set aside enough. CFO John Shrewsberry said the bank released reserves under CECL because of historical credit marks that had to be reversed under the standard.

He also said the bank likely has different risk weighting than peers on assets such as jumbo mortgage and credit cards. Further, the bank does not have as many credit cards as its peers. Credit cards have required larger reserve builds than other asset classes in the CECL transition and the first-quarter provisioning.

"Under most conditions, we wish [credit card] was a bigger capability for Wells Fargo," Shrewsberry said, according to a transcript. "At times like this, [it] is a little bit of a saving grace."

Wells Fargo's CECL release was driven by commercial loans, where the bank shed $2.9 billion of reserves. In the consumer book, the bank increased its reserves by $1.5 billion for CECL. However, the bank's first-quarter reserve build was more heavily weighted toward commercial than consumer.

At JPMorgan, the bank's CECL transition also included a reserve release for its wholesale book that partially offset a huge jump in reserves for consumer loans. While the bank's first-quarter provisioning for the weakened economic outlook required greater reserves for commercial loans, the consumer segment still accounted for the majority of the first-quarter reserve build.

Analyst reactions were similar for Bank of America Corp. and Citigroup Inc., Citigroup reported a $4.9 billion reserve increase in the first quarter after sending $4.1 billion to reserves for the CECL transition.

Bank of America boosted its reserves by $3.6 billion in the first quarter and $3.3 billion at CECL adoption. Similar to JPMorgan, Bank of America's CECL transition brought more reserves for consumer and a release for commercial loans. That trend reversed in the first quarter with a $2.1 billion ramp-up in commercial loan reserves, which accounted for the majority of its first-quarter provision.

Analysts at Keefe Bruyette & Woods noted that Citigroup's stock underperformed peers the day of its earnings after posting a larger provision number than expected. But the analysts suggested it would not be sufficient, predicting more near-term headwinds.

"Our earnings estimates are significantly below consensus, and we expect downward pressure on consensus as we move through the first two quarters of 2020 and expectations for credit losses are ratcheted up by the Street," analysts wrote.

Management teams acknowledged the likelihood that additional provisioning could be required. KBW's analysts wrote that Citigroup's retail services segment in cards would "see elevated losses and lower revenues" due to its retail partners being particularly exposed to shelter-in-place orders. Management addressed the issue in the bank's earnings call and underscored the uncertainty clouding first-quarter results.

"Obviously, the retail services [segment has partners that] are more directly impacted by the COVID-19 situation, but we also have the $2 trillion relief or stimulus that's been introduced," said Citigroup CFO Mark Mason, according to a transcript. "[It's] a little bit unclear as to how that ultimately plays out and impacts the behavior. So lots of puts and takes going through the model."