Fifth Third Bancorp executives said the bank will need a significant build in total reserves to comply with the current expected credit loss accounting standard.
CFO Tayfun Tuzun said during the Oct. 22 third-quarter earnings call that the bank expects to build its reserves by 40% to 55% when CECL becomes effective on Jan. 1, 2020. He said the reserve build was made more dramatic due to the "double-count" issue from its acquisition of MB Financial Inc. For the legacy portfolio, Fifth Third expects a reserve build of 30% to 40%. Tuzun said the difference is driven by the fact that the bank cannot convert the discount on non-credit-impaired loans into loan reserves.
During the call's question-and-answer session, an analyst asked for Fifth Third's "Day 2" guidance for CECL — an estimate of how much the new standard will increase provisioning on a go-forward basis. Tuzun said it is difficult to provide a precise number as the company is still finalizing its models and it is largely determined by the economic scenario. Still, he said there is "a decent chance" that provisioning will need to increase relative to today's run rate.
But Tuzun did provide some guidance on CECL regarding Fifth Third's total reserves as a portion of its overall loan book. He said the Day 1 ratio will be on the high end considering the bank does not have plans to grow residential mortgages, home equity lines of credit or consumer loans. Since those three loan types tend to require greater reserve builds under CECL, Tuzun said, the Day 1 ratio might start to decline assuming the bank's commercial loan growth returns to historical norms.