US bank reserves grow as percentage of gross loans stagnates in Q2 2024

US banks' reserves rose for the ninth consecutive quarter, while the industry's ratio of reserves to gross loans held steady.

Total reserves rose to $220.54 billion from $218.62 billion in the previous quarter, an approximately $1.9 billion increase, according to S&P Global Market Intelligence data. This marks a larger boost than the approximately $740 million increase recorded in the first quarter, though it is still smaller than the sequential increases from the second quarter of 2022 through the fourth quarter of 2023. Reserves as a percentage of gross loans was the same as the first quarter at 1.76%. Year over year, reserves to gross loans grew just 6 basis points, down from 11 basis points in the previous quarter.

Largest reserve releases

Among banks with more than $5 billion in assets and a loan-to-deposit (LTD) ratio above 40% as of June 30, Merrick Bank reported both the largest sequential drop at 210 basis points and the largest year-over-year decrease at 235 basis points.

Several of the banks in the analysis, such as Capital One Financial Corp., Discover Financial Services, Wintrust Financial Corp., Fulton Financial Corp., WaFd Inc., Banc of California Inc. and First Busey Corp., have either announced or completed M&A deals since the beginning of 2023. Buyers in M&A transactions often mark seller assets — including loans-to-fair-market value upon closing a deal — as part of purchase acquisition accounting, minimizing the need to build reserves.

Banc of California, for example, which reported the the 12th-largest sequential decline of the quarter at 16 basis points still maintained a "solid level of reserves," President and CEO Jared Wolff said during the company's second-quarter earnings presentation.

"I feel like we're well covered for the portfolio that we have and I think we're on top of the loans that might pose risk," Wolff said.

Discover Financial Services, which reported the second-largest sequential decrease, released $869 million in reserves related to student loans during the second quarter after the company agreed to sell its student loan portfolio, executives said during an earnings call.

Largest reserve increases

Among the 15 banks with at least $5 billion in assets and an LTD ratio greater than 40%, SMBC MANUBANK reported the largest sequential increase in reserves as a percentage of gross loans during the second quarter at 96 basis points. The company also reported the largest year-over-year increase, at 233 basis points.

Other banks with the biggest reserve increases, including New York Community Bancorp Inc.'s Flagstar Bank NA subsidiary, Valley National Bancorp, Eagle Bancorp Inc. and Bank OZK, had sizable commercial real estate portfolios. Although concerns around credit quality in commercial real estate portfolios continue to weigh on the industry, banks are well reserved and generally reported solid second-quarter earnings results, according to sell-side analysts.

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Provisions for expected credit losses at US banks rose to $23.28 billion in the second quarter from $21.10 billion in the previous quarter. At the same time, net charge-offs increased to $21.29 billion from $20.30 billion in the previous quarter, while provisions as a percentage of net charge-offs jumped to 109.4% from 103.9%, breaking a five-quarter streak of decreases.