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As CECL implementation approaches, several banks 'scrambling' to finish models

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As CECL implementation approaches, several banks 'scrambling' to finish models

With less than one month until the implementation deadline for a pivotal accounting change, several banks have yet to provide an estimate on the expected effects.

The current expected credit loss accounting standard will change how banks calculate loan loss reserves, replacing the incurred loss method. Most banks that have provided estimates forecast a significant increase in reserves. Diversified regional banks have generally pegged a 20% to 40% increase while institutions with significant credit card or consumer loan exposure are projecting 50% to 100% increases.

A handful of large banks have projected immaterial changes or even a potential release of reserves. And several banks have said they are not yet ready to provide an estimate even though they have to implement the standard on Jan. 1, 2020. Some banks are unlikely to have full clarity on their reserve builds at the implementation date and will instead wait until reporting first-quarter 2020 earnings to provide a precise figure, said Chad Kellar, a partner with accounting firm Crowe LLP who advises financial institutions on CECL.

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"There are some banks that are going to be scrambling right at the finish line and even in their 10-Ks you're going to see quite a few accelerated filers talking in range terms, still, as opposed to a definite number," Kellar said in an interview. Annual reports, or Forms 10-K, are typically filed in February.

Most of the biggest banks have reported estimates. S&P Global Market Intelligence reviewed quarterly reports for the 61 U.S. banks with more than $25 billion in assets and found 10 that had yet to provide an estimate on the expected impact. The analysis was limited to U.S.-headquartered, publicly traded financial institutions classified as banks under S&P Global's Global Industry Classification Standard.

The largest bank without a disclosure was SunTrust Banks Inc., which just completed its merger with BB&T Corp. The bank stated in its quarterly report that the company expects an increase in its total reserves, but the size of the build would depend on economic forecasts and the company's portfolio. Management also said the company is still evaluating the impact of the merger. BB&T estimated a reserve build of 30% to 50% for its portfolio, not including SunTrust.

The nation's three largest banks — JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. — provided CECL estimates in the first-quarter 2019 earnings season. Many of the smaller banks have not provided forecasts, although they also face the effective date of Jan. 1, 2020.

"There are still a vast number of public companies that have said it's going to be immaterial and some that haven't disclosed the actual quantification," said Tom Barbieri, a partner with accounting firm PwC who specializes in CECL.

At the same time, there have been enough disclosures that investors can get a good sense of how banks without disclosures will be affected by the new standard, said Joe Stieven, president of bank-focused investment adviser Stieven Capital Advisors.

"[B]ecause of the homogeneity of the banking industry, if you find Bank A and Bank B are similar and Bank A has disclosed, you could probably get in the neighborhood of guessing what it's going to look like for Bank B," Stieven said in an interview.

A small number of banks appear to be diverging from the broader trend of projecting a reserve increase of 20% to 40%. Two large banks are actually projecting reserve releases: Wells Fargo expects to release $1.5 billion of reserves, and Zions Bancorp. NA forecast a reserve change ranging from a release of 15% to a 5% reserve build.

Reserve releases or a failure to build reserves at adoption could be a potential misstep considering the economy could be headed for a downturn, said Ron Meyer, a senior business adviser for Linedata, a technology company with a CECL product.

"If you're telling me that somebody is going to release reserves, I don't perceive that as a good idea, not at this time coming up on a recession," he said in an interview. "I don't think that would be a prudent move."