Bank of America Corp., which joined other big banks by lowering its credit allowance by $826 million in the fourth quarter of 2020, said credit card losses could peak in the first quarter of 2021, then taper in the second quarter and hold about level from there for the rest of the year.
The bank reduced its allowance for consumer loans by $620 million to $10.07 billion and its allowance for commercial loans by $174 million to $8.73 billion, it reported in its fourth-quarter financial results. BofA cited an improved macroeconomic outlook and smaller exposures to industries more heavily impacted by the pandemic. In the 2020 third quarter, BofA released reserves for consumer loans and added reserves for commercial loans, for a relatively modest net addition overall.
The bank said its criticized commercial loans increased $2.96 billion from the third quarter to $38.67 billion, mostly because of hotel loans in its commercial real estate portfolio.
In credit cards, BofA said that early-stage delinquencies in the fourth quarter had fallen below pre-pandemic levels, but that loans past due by about three months or more had increased following the expiration of payment deferrals. The bank projected that card net charge-offs, which had fallen in each of the final three quarters of 2020 despite the recession, would increase modestly in the first quarter of 2021, and then decline again in the second quarter. Card loans are typically charged off about 180 days after they first become past due.
The decline in early-stage delinquencies is a positive sign and "reflects the health of the consumer, improvement in the economy [and] government stimulus," CFO Paul Donofrio said in a call with reporters. He noted that cards are the primary driver of consumer loan losses.
"Beyond [the first quarter of 2021], though the environment certainly remains uncertain, we now think it's more likely, particularly ... because of the latest stimulus, that card losses will decline modestly in [the second quarter] and remain roughly at the [second-quarter] levels for the remainder of the year," he said.
In October 2020, Donofrio said significant card net charge-offs would not likely appear until the second half of 2021 "should they ever materialize."
At year-end 2020, BofA's allowance for consumer loans was still about $2.2 billion higher than at Jan. 1, 2020, when it adopted the current expected credit loss accounting standard. The bank's consumer loans contracted by $36.97 billion in 2020 to $428.8 billion, driven largely by declining card balances.
Donofrio said that the outlook BofA uses to determines reserves, which is weighted across a range of scenarios, now anticipates that GDP will recover to its fourth-quarter 2019 level in early 2022, sooner than its projection of the fourth quarter of 2022 made when BofA set its third-quarter 2020 allowance. The current outlook also anticipates that the unemployment rate will end 2021 at about its current level.