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Capital One sees 40% increase to allowance for credit losses under CECL

Capital One Financial Corp. is adding $2.87 billion to its allowance for credit losses as part of a newly implemented accounting rule in the U.S.

Under the current expected credit loss, or CECL, accounting standard, U.S. banks must allocate enough reserves to cover the lifetime expected losses of a loan as soon as they make it. Large publicly traded bank holding companies were required to start implementing CECL on Jan. 1.

As part of that accounting shift, Capital One disclosed Jan. 21 that it plans to increase its reserves by 40%, marking the higher end of its previously released 30%-to-40% guidance range set in October 2019.

The company specifically disclosed in an investor presentation that its allowance for credit losses across the entire company will stand at $10.08 billion including the CECL impact. Capital One plans to slowly phase in 25% of the $2.87 billion each year for regulatory capital purposes, according to the investor presentation.

The phased-in regulatory capital adoption will hit Capital One's current equity Tier 1 capital ratio by 16 basis points in the first quarter of the year, which aligns with its prior estimate.

Consumer banking will see the largest increase to its credit loss allowances as part of the new accounting standard. Capital One will hike reserves in the business line by 48%, while it plans for a 42% jump in allowance for credit losses in its credit card segment. Allowance for credit losses in its commercial banking business will be increased by 13%.

Capital One's provision for credit losses in the fourth quarter of 2019 was $1.82 billion. The company had reported provisions for credit losses of $1.38 billion for the prior quarter and $1.64 billion for the fourth quarter of 2018.