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What Lies Ahead For U.S. Bank Provisions For Loan Losses

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What Lies Ahead For U.S. Bank Provisions For Loan Losses

With the economic downturn caused by the coronavirus pandemic, U.S. banks have had to prepare for the likelihood of elevated borrower defaults and have more than doubled their allowances for loan losses. This, on the back of about $115 billion of provisions in the first half of 2020, represented major progress toward absorbing the loan losses likely to result from the economic downturn.

Still, while the pace of provisioning may slow, we believe U.S. banks in aggregate are far from done with provisioning for pandemic-related losses. Our base case projection is that the pandemic will trigger 3% loan losses, forcing banks to provision more than $330 billion cumulatively. The fluidity of the current environment makes forecasting difficult. Still, if our base case proves roughly accurate--which will depend largely on the economy and government support measures--we would expect rated banks to report positive but muted earnings in the next four quarters on average because of the continued need to provision for loan losses.

The allowance levels of banks at the end of the second quarter may indicate that they are more sanguine in their loss expectations than we are, and performance will be highly sensitive to how those expectations evolve. Performance will also vary significantly from bank to bank, depending not only on the quality of their underwriting and loan losses, but also on the sufficiency of their second-quarter allowances and on their ability to absorb losses through prepovision net revenue (PPNR).

For instance, it appears larger banks generally have more aggressively built their allowances and have stronger PPNR than regional and smaller banks and are less likely to have bottom-line losses should loan losses approach our base-case estimate for the industry. We expect our ratings to hinge in part on such factors.

Our Expectations For Pandemic-Related Losses

We have set our base-case forecast for pandemic-related loan losses for Federal Deposit Insurance Corp. (FDIC)-insured banks in aggregate at about half of the 6.3% loss rate the Fed projects for the 33 banks part of the 2020 Dodd-Frank Act Stress Test (DFAST).

We consider this an adverse case and one that would be much less severe than the loan losses from the 2008-2009 financial crisis. Banks reported provisions in excess of 5.5% of their loans in 2008 and 2009 collectively and charged off more than 5% of loans in 2009 and 2010 and another 1.6% in 2011.

We consider our economists' forecast for 5.0% contraction in U.S. GDP this year and a 5.2% recovery next year. We balance that difficult outlook against the government support measures for individuals and businesses, such as the Paycheck Protection Program and expanded unemployment insurance, which have likely so far helped prevent outsized rises in loan defaults.

Chart 1

image

How Robust Are Allowances For Loan Losses?

In the first half of 2020, the ratio of allowances to loans for rated U.S. banks rose to a median 1.7% (from 1.0% at year-end 2019) and an aggregate 2.7% (from 1.3%). In other words rated banks increased their allowances by an amount equivalent to roughly 1.4% of loans (2.7% less the starting 1.3%).

The aggregate allowance far exceeds the median in part because of differences in loan mixes between some of the largest banks and the regional banks. Some of the large banks tend to have far greater proportions of credit card loans, which have required higher allowances than most other types of loans. For instance, Citigroup Inc. and JPMorgan Chase & Co., both of which have significant credit card loan balances, have some of the highest allowance-to-loan ratios.

Banks set their allowance under the current expected credit losses (CECL) accounting standard basically by estimating their lifetime loan losses under a base-case economic scenario--with projections for variables like GDP growth and unemployment. They then may make further adjustments to reflect the uncertainty of the base-case scenario or the likelihood of a more stressful scenario. The more stressful the projected scenario and the greater the bank's exposure to that scenario, the greater its allowance should be.

Provisions taken in the first half of the year drove about three-quarters of the increase in allowances. One-time adjustments to allowances made on Jan. 1, 2020, for the implementation of CECL --which requires banks to set allowances equal to expected lifetime losses--drove the remainder.

That implies that rated banks believe that lifetime losses on their loans have increased by about 1.1 percentage points because of the pandemic (equal to the 1.4 percentage point total increase in allowances less the portion due to CECL implementation on Jan. 1). (We refer specifically to allowances for funded loans because data on allowances for unfunded loans was not yet consistently available. We expect to gather that data once banks file consolidated regulatory financial reports. Including allowances on unfunded loans would push total allowances modestly higher.)

While allowances rose sharply, a 2.7% aggregate ratio and a 1.1 percentage point increase following the onset of the pandemic would still fall short, if our base-case loss projection of 3% were to be realized. That implies that banks may be expecting lower losses than our 3% base case. Therefore, to better gauge the robustness of allowances and make distinctions between banks, we look at not only allowances to total loans, but also the following measures:

  • Allowance by type of loan
  • For banks that participated in the Fed's 2020 DFAST, allowance to the Fed's projection of loan losses in its severely adverse scenario
  • For banks that did not participate in DFAST, allowance to a projection of loan losses made by applying the Fed's aggregate loss rates in DFAST to each bank's loan mix
  • Allowance to the company's projection of loan losses (for banks required to perform a company-run version of DFAST)
  • Capital plus the allowance relative to regulatory risk-weighted assets

Looking at allowances relative to DFAST losses suggest large banks may have more aggressively added to their allowances than regional and small banks. Therefore, the 2.7% aggregate allowance for rated banks may exceed the 1.7% median not only because of loan mix (and greater credit card exposure), but also because of greater conservativeness. For instance, at the median, the allowances of DFAST banks (which are the country's largest banks) equated to 40% of DFAST loan losses. The allowance of other rated banks equated to just 30% of their implied DFAST losses (based on their loans mixes).

Some of the large banks were able to absorb major provisions in the first half of the year and remain profitable in part because of especially strong revenue generation in segments of their capital markets businesses.

Some regional and small banks with lower proportional allowance levels likely simply have lower-risk loans, such as First Republic Bank. Others hold significant levels of loans that had been marked as part of acquisitions, meaning those loans may require no allowance. Therefore, the ratios of allowances to total loans (including acquired loans) for those banks, such as TCF Financial, First Horizon, and Truist, may be stronger than they appear.

Table 1

DFAST Banks: Allowances To Funded Loans And Leases, DFAST Loan Losses, And Capital
Second-quarter 2020, sorted by all / Fed DFAST loan losses
(%) All / Fed DFAST loan losses All / Company DFAST loan losses All / Loans CET 1 ratio CET1 capital + ALL / RWA
MEDIAN 40.4 52.5 2.2 11.4 12.6

State Street Corp.

11.8 47.0 0.5 12.3 12.5

Northern Trust Corp.

12.1 54.5 0.6 13.4 13.7

Morgan Stanley

16.3 30.9 0.6 16.1 16.3

Bank of New York Mellon Corp.

20.1 19.2 0.5 12.6 12.8

M&T Bank Corp.

32.8 N/A 1.7 9.5 11.1

KeyCorp

33.5 N/A 1.6 9.1 10.3

Fifth Third Bancorp

36.4 N/A 2.3 9.7 11.6

Citizens Financial Group Inc.

36.5 N/A 1.9 9.6 11.3

Truist Financial Corp.

37.3 52.8 1.8 9.7 11.2

Goldman Sachs Group Inc.

39.8 43.8 3.3 12.4 13.0

Wells Fargo & Co.

39.9 68.3 2.0 11.0 12.5

Capital One Financial Corp.

40.9 49.7 6.7 12.4 18.2

American Express Co.

41.1 N/A 5.9 13.6 18.7

Bank of America Corp.

41.1 52.5 1.9 11.4 12.7

Ally Financial Inc.

41.4 N/A 2.8 10.1 12.5

Regions Financial Corp.

42.9 N/A 2.5 8.9 11.0

U.S. Bancorp

43.2 49.6 2.4 9.0 10.9

Huntington Bancshares Inc.

44.8 N/A 2.1 9.8 11.8

PNC Financial Services Group Inc.

49.0 58.7 2.3 11.3 13.0

JPMorgan Chase & Co.

49.8 65.1 3.3 12.4 14.5

Discover Financial Services

50.2 N/A 9.2 11.7 20.7

Citigroup Inc.

55.4 73.2 3.9 11.5 13.7
DFAST--Dodd-Frank Act Stress Test. CET1--Common equity Tier 1. RWA--Risk-weighted assets. N/A--Not applicable.

Table 2

Non-DFAST Banks: Allowances To Funded Loans And Leases, DFAST Loan Losses, And Capital
Second-quarter 2020, Sorted by All / Implied DFAST loan losses
(%) All / Implied DFAST loan losses All / Loans CET 1 ratio CET1 capital + all / RWA
MEDIAN 30.7 1.5 11.1 12.3

New York Community Bancorp Inc.

12.0 0.4 9.8 10.2

Valley National Bancorp

18.0 1.0 9.5 10.5

First Republic Bank

18.2 0.6 9.8 10.4

Texas Capital Bancshares Inc.

18.3 1.0 8.9 9.8

People's United Financial Inc.

19.5 0.9 9.7 10.6

UMB Financial Corp.

21.6 1.3 11.9 12.9

Trustmark Corp.

22.6 1.1 11.4 12.4

First Commonwealth Financial Corp.

23.0 1.2 10.7 11.9

Cullen/Frost Bankers Inc.

23.2 1.4 12.5 13.5

TCF Financial Corp.

24.5 1.3 11.1 12.3

Commerce Bancshares Inc.

25.1 1.5 13.3 14.5

Synovus Financial Corp.

25.2 1.5 8.9 10.3

F.N.B. Corp.

27.4 1.4 9.4 10.7

First Hawaiian Inc.

28.0 1.4 11.9 13.2

S&T Bancorp Inc.

28.4 1.5 10.7 12.3

Comerica Inc.

29.0 1.9 10.0 11.5

BancorpSouth Bank

29.8 1.5 10.2 11.6

Zions Bancorporation N.A.

30.7 1.6 10.2 11.7

First Horizon National Corp.

31.1 1.6 9.3 10.7

BOK Financial Corp.

31.2 1.8 11.4 12.8

Associated Banc-Corp

31.4 1.5 10.3 11.7

First Midwest Bancorp Inc.

31.6 1.6 9.7 11.3

Umpqua Holdings Corp.

32.9 1.6 11.2 12.8

Investors Bancorp Inc.

33.9 1.3 13.1 14.4

SVB Financial Group

34.0 1.6 12.6 13.8

Webster Financial Corp.

34.7 1.6 11.2 12.8

East West Bancorp Inc.

34.8 1.7 12.7 14.4

Hancock Whitney Corp.

35.5 2.0 9.8 11.6

Cadence Bancorporation

45.0 2.7 11.7 14.2

CIT Group Inc.

60.2 3.2 10.0 12.3

Popular Inc.

63.3 3.2 15.7 18.8

First BanCorp.

69.3 3.4 21.5 25.0

OFG Bancorp

70.4 3.3 12.0 15.4

Synchrony Financial

70.9 12.5 15.3 28.0

Sallie Mae Bank

126.9 8.4 12.4 20.2
DFAST--Dodd-Frank Act Stress Test. CET1--Common equity Tier 1. RWA--Risk-weighted assets. N/A--Not applicable. Notes: Implied DFAST losses are calculated by applying 50% of the aggregate loss rates per type of loan from 2020 DFAST to each bank's loan portfolio. See table 7 for further details. Our rating on First Horizon is unsolicited.

Table 3

Allowance To Loans By Type, Second-Quarter 2020
Based on call report data
(%) Construction Commercial real estate Residential real estate Commercial Credit cards Other consumer Total
MEDIAN 1.9 1.5 1.0 1.6 9.2 2.9 1.7

New York Community Bancorp Inc.

1.6 0.4 0.5 0.5 - 1.9 0.4

State Street Corp.

- 0.4 - 0.5 - 0.0 0.5

First Republic Bank

1.3 0.9 0.2 1.1 - 0.8 0.6

Northern Trust Corp.

2.1 1.5 0.7 0.5 - 0.2 0.6

People's United Financial Inc.

0.6 0.7 1.1 0.9 0.6 4.2 0.9

Valley National Bancorp

0.8 0.7 0.6 1.9 2.1 0.8 1.0

Bank of New York Mellon Corp.

10.4 3.2 1.6 0.3 - - 1.0

Texas Capital Bancshares Inc.

0.4 1.4 1.0 1.0 - - 1.0

Trustmark Corp.

1.8 1.3 1.3 0.6 1.3 3.8 1.1

Investors Bancorp Inc.

3.0 1.4 0.8 2.0 - 0.2 1.3

TCF Financial Corp.

4.6 1.2 1.4 0.9 - 1.5 1.3

UMB Financial Corp.

0.2 1.2 0.4 1.5 5.8 1.0 1.3

Cullen/Frost Bankers Inc.

1.3 1.4 0.7 1.5 - 1.6 1.4

F.N.B. Corp.

1.9 1.9 0.9 1.4 1.5 1.2 1.4
First Hawaiian Inc. 0.9 1.6 0.9 0.7 4.9 4.4 1.4

Associated Banc-Corp

2.2 1.4 0.7 2.0 10.1 1.9 1.5

Commerce Bancshares Inc.

1.9 0.8 0.4 1.3 11.4 1.3 1.5

Synovus Financial Corp.

2.8 1.2 1.8 1.2 11.8 1.6 1.5

S&T Bancorp Inc.

1.9 1.9 1.1 1.1 - 3.2 1.5

BancorpSouth Bank

2.1 1.3 1.8 1.0 14.2 2.7 1.5

Truist Financial Corp.

1.9 1.4 1.4 1.4 6.7 3.5 1.8

Zions Bancorporation N.A.

2.1 0.9 1.3 1.8 1.3 1.4 1.6

Umpqua Holdings Corp.

4.5 1.2 0.8 2.3 - 3.0 1.6

SVB Financial Group

0.4 2.5 1.9 1.5 0.6 4.9 1.6

First Midwest Bancorp Inc.

1.8 1.3 1.0 1.9 4.8 4.5 1.6

KeyCorp

2.1 2.2 1.7 1.2 10.9 2.4 1.6

Webster Financial Corp.

1.5 2.6 1.0 1.6 - 7.0 1.6

First Horizon National Corp.

1.2 1.5 2.3 1.4 3.2 6.0 1.6

M&T Bank Corp.

2.4 1.3 1.0 1.4 9.0 3.7 1.7

East West Bancorp Inc.

3.3 1.6 0.5 2.8 - 0.3 1.7

BOK Financial Corp.

0.0 1.5 2.3 1.9 - 0.5 1.8

Comerica Inc.

1.1 2.2 1.3 1.9 - 1.8 1.9

Citizens Financial Group Inc.

7.4 0.6 0.7 1.8 7.4 3.1 1.9

Hancock Whitney Corp.

2.8 2.6 2.1 1.4 9.1 2.2 2.0

Bank of America Corp.

2.6 3.6 0.3 1.3 11.0 1.0 2.0

Wells Fargo & Co.

2.0 2.0 0.6 2.0 10.5 3.8 2.1

Huntington Bancshares Inc.

5.1 2.9 0.7 2.7 10.5 1.9 2.1

PNC Financial Services Group Inc.

1.2 1.4 0.9 2.0 15.3 4.6 2.3

Fifth Third Bancorp

1.9 3.5 2.7 1.7 14.8 2.0 2.3

U.S. Bancorp

3.2 2.6 0.9 2.0 10.1 1.9 2.4

Regions Financial Corp.

1.7 3.4 1.4 2.1 9.6 6.8 2.5

Cadence Bancorporation

6.5 1.9 1.5 2.7 - 5.1 2.7

Ally Financial Inc.

1.1 1.6 0.2 0.7 - 4.8 2.9

Popular Inc.

0.3 2.6 3.1 1.9 6.0 5.4 3.2

CIT Group Inc.

2.9 2.9 2.5 3.9 - 1.7 3.3

JPMorgan Chase & Co.

5.8 1.5 1.4 2.2 12.6 2.1 3.3

First BanCorp.

5.0 2.8 3.8 1.5 8.8 4.1 3.3

OFG Bancorp

3.3 2.0 2.1 4.9 17.6 4.0 3.3

Citigroup Inc.

0.6 1.8 1.0 1.8 11.1 3.2 3.7

American Express Co.

- - - 12.0 6.4 6.9 6.6

Capital One Financial Corp.

- - - 2.4 11.3 4.3 6.7

Sallie Mae Bank

- - - - 9.2 8.3 8.3

Discover Financial Services

0.0 - 2.3 4.8 9.3 9.7 9.2

Synchrony Financial

- - - 5.5 13.5 5.7 13.2
Notes: All data is based on call report filings made by subsidiary banks because consolidated regulatory financial data was not yet available. Therefore, the allowance levels may differ slightly for the consolidated bank. Excludes Goldman Sachs and Morgan Stanley because they have significant allowances outside their subsidiary banks.

What Do These Allowance Levels Say About Future Provisions?

As the extent of loan losses becomes clearer, banks will need to set provisions roughly equal to the sum of:

  • The excess of pandemic-related losses over current allowances; and
  • An amount to replenish their allowance--likely to a ratio of allowances to loans around where it was at Jan. 1, 2020--as losses are absorbed. (See the appendix for a simple calculation to explain this further.)

If we assume that the 22 banks part of DFAST (excluding 11 others with foreign parents) ultimately have losses equal to 50% of the Fed's projection in its severely adverse scenario, those banks would be just shy of halfway finished with their provisions. In fact, these banks reported provisions and Day 1 CECL adjustments in the first half of 2020 equal to about 25% of the Fed's projected DFAST provisions (or half of those provisions assuming 50% of the Fed's losses). Assuming a loss rate equal to 25% of the Fed's projection would mean these banks are essentially finished with provisions.

For banks not part of DFAST--who tend to have lower allowance levels--we believe they have further to go. Applying 50% of DFAST loan loss rates by type of loan to their portfolios implies that they are only about 32% of the way done with provisioning. If we apply 25% of DFAST loan loss rates, these banks would be about 60% complete with provisioning.

We reflect this general weakness compared with larger banks in our ratings. For instance, more than one-third of our ratings on U.S. banks have a negative outlook, and most of these are regional banks.

Table 4

Allowance And Hypothetical Provisions Assuming 50% Of DFAST Severely Adverse Loan Losses
--DFAST banks-- --Non-DFAST banks--
(Bil. $) Allowance / Loans (%) (Bil. $) Allowance / Loans (%)
4Q allowance + day 1 CECL adjustment 102.2 1.67 19.6 2.05
1H2020 provisions 92.7 10.1
1H2020 net charge-offs -26.2 -4.2
2Q20 allowance 168.7 2.79 25.5 2.51
50% of DFAST loan losses (less 1H2020 net charge-offs) -166.6 -26.1
Resulting allowance before provisions 2.0 0.03 -0.6 (0.10)
Provisions needed to rebuild allowance 98.9 21.5
Final allowance after losses and provisions 101.0 1.67 20.8 2.05
1H2020 provisions / Total provisions required (%) 48 32
DFAST--Dodd-Frank Act Stress Test. Notes: 1H20 net charge-offs estimated as the difference between the provisions and the change in allowance.

Chart 2

image

How Well Positioned Are Banks To Absorb Future Provisions?

We believe that most rated banks could generate enough preprovision net revenue to remain profitable over the next four quarters assuming:

  • Banks report enough additional provisions to cover 50% of the loan losses in DFAST (half of the Fed's projected amount for DFAST banks and half of the amounts implied by the Fed's aggregate loan loss rates for non-DFAST banks)
  • PPNR remains steady at the second-quarter rate over the next four quarters

We use a four-quarter period (through the second quarter of 2021) because CECL should force banks to take provisions as their loss expectations evolve. However, there is a possibility banks could take pandemic-related provisions more gradually and beyond the next four quarters, making losses easier to absorb with earnings. That would occur if their expectations of rising losses build only gradually. Also, a significant portion of the actual charge-offs could occur later than the next four quarters. While we believe most banks would remain profitable for the period as a whole, they could take losses in any given quarter that has a disproportionate share of the remaining needed provisions.

Banks that have already built the largest allowances relative to potential losses will need the least PPNR to cover additional provisions. Banks with the strongest PPNR generation will be able to cover the greatest amount of additional provisions needed.

Although most banks would remain profitable in this scenario, many would have very thin earnings. Furthermore, any dividends they pay and balance sheet growth they experience would weigh on their capital ratios. The Fed's limitation on dividends for banks that were part of the stress test provides some support for capital ratios. The Fed mandated that dividend payouts are not to exceed the average of a bank's net income for the four preceding quarters.

Table 5

DFAST Banks: Second-Quarter PPNR (Annualized) Versus Remaining Provisions Assuming 50% Of DFAST Provisions
(Bil. $) 2Q PPNR annualized 50% of DFAST provision Provisions taken + day 1 CECL adjustment Implied provisions remaining Implied pretax income (next 12 months): Annualized PPNR Less Provisions Remaining Implied pretax income / Assets (%)
MEDIAN 6.3 5.3 2.9 2.6 3.0

0.77

Capital One Financial Corp.

11.1 23.9 12.5 11.3 (0.2) (0.05)

Ally Financial Inc.

2.5 5.1 2.5 2.5 (0.0) (0.01)

Wells Fargo & Co.

16.9 26.5 12.2 14.2 2.6 0.13

Fifth Third Bancorp

2.9 4.3 1.8 2.5 0.4 0.21

M&T Bank Corp.

2.5 2.9 0.7 2.1 0.4 0.29

Citizens Financial Group Inc.

3.1 4.0 1.5 2.5 0.6 0.33

Northern Trust Corp.

1.9 1.1 0.1 1.0 0.9 0.61

KeyCorp

2.8 2.8 1.1 1.7 1.1 0.62

Truist Financial Corp.

8.0 9.7 4.9 4.8 3.2 0.63

Regions Financial Corp.

2.5 3.2 1.7 1.5 1.0 0.71

PNC Financial Services Group Inc.

6.2 6.6 3.8 2.8 3.4 0.75

Bank of America Corp.

35.7 26.6 12.8 13.7 22.0 0.80

Goldman Sachs Group Inc.

11.5 5.6 3.3 2.3 9.2 0.81

Huntington Bancshares Inc.

2.0 2.2 1.2 1.0 1.0 0.88

U.S. Bancorp

10.0 9.3 4.2 5.1 4.9 0.90

State Street Corp.

3.4 0.7 0.1 0.6 2.8 1.00

Bank of New York Mellon Corp.

5.3 0.9 0.2 0.7 4.6 1.05

Citigroup Inc.

37.4 25.0 19.2 5.8 31.6 1.42

JPMorgan Chase & Co.

64.2 36.2 22.9 13.2 50.9 1.59

Morgan Stanley

18.4 3.3 0.5 2.8 15.7 1.60

American Express Co.

8.7 9.7 5.0 4.7 4.0 2.13

Discover Financial Services

6.3 9.3 6.3 3.0 3.4 2.95
DFAST--Dodd-Frank Act Stress Test. PPNR--Prepovision net revenue. CECL--Current expected credit losses. Notes: PPNR is calculated as reported pretax income plus provisions. No further adjustments to PPNR were made except for Wells Fargo. For that bank, $1.2 billion in operating losses, primarily due to customer remediation accruals, and $261 million in gains from the sale of loans were netted out.

Table 6

Non-DFAST Banks: Second-Quarter PPNR (Annualized) Versus Remaining Provisions Assuming 50% Of Implied DFAST Provisions
(Bil. $) 2Q PPNR annualized 50% of implied DFAST provision Provisions taken + day 1 CECL adjustment Implied provisions remaining Implied pretax income (next 12 months): Annualized PPNR less provisions remaining Pretax income / Assets (%)
MEDIAN 0.5 0.8 0.2 0.4 0.1 0.15

Texas Capital Bancshares Inc.

0.2 0.8 0.2 0.6 (0.4) (1.06)

TCF Financial Corp.

0.4 1.1 0.4 0.7 (0.2) (0.49)

People's United Financial Inc.

0.8 1.2 0.2 1.0 (0.3) (0.41)

Comerica Inc.

1.1 2.0 0.6 1.4 (0.3) (0.36)

Valley National Bancorp

0.7 1.0 0.2 0.8 (0.1) (0.31)

New York Community Bancorp Inc.

0.6 0.8 0.0 0.8 (0.2) (0.29)

First Republic Bank

1.4 1.8 0.1 1.7 (0.3) (0.26)

First Midwest Bancorp Inc.

0.2 0.4 0.1 0.3 (0.1) (0.25)

First Commonwealth Financial Corp.

0.1 0.2 0.0 0.2 (0.0) (0.22)

Zions Bancorporation N.A.

1.0 1.6 0.4 1.2 (0.2) (0.22)

UMB Financial Corp.

0.4 0.5 0.1 0.4 (0.0) (0.16)

F.N.B. Corp.

0.5 0.8 0.2 0.6 (0.1) (0.15)

Investors Bancorp Inc.

0.4 0.5 0.1 0.4 (0.0) (0.10)

Trustmark Corp.

0.2 0.3 0.0 0.3 (0.0) (0.02)

Webster Financial Corp.

0.4 0.6 0.2 0.4 0.0 0.05

Synovus Financial Corp.

1.1 1.3 0.3 1.0 0.1 0.10

CIT Group Inc.

0.3 1.1 1.0 0.2 0.1 0.13
First Hawaiian Inc. 0.3 0.4 0.1 0.3 0.0 0.15

First Horizon National Corp.

0.7 1.0 0.4 0.6 0.1 0.19

Cullen/Frost Bankers Inc.

0.5 0.6 0.2 0.4 0.1 0.22

East West Bancorp Inc.

0.9 1.0 0.3 0.7 0.1 0.25

Commerce Bancshares Inc.

0.5 0.5 0.1 0.4 0.1 0.28

BancorpSouth Bank

0.4 0.5 0.1 0.3 0.1 0.31

BOK Financial Corp.

0.9 0.8 0.3 0.5 0.3 0.70

Umpqua Holdings Corp.

0.6 0.6 0.3 0.4 0.2 0.75

S&T Bancorp Inc.

0.2 0.2 0.1 0.1 0.1 0.76

Popular Inc.

0.9 0.8 0.6 0.2 0.6 0.97

Hancock Whitney Corp.

0.5 0.7 0.6 0.1 0.4 1.06

SVB Financial Group

1.6 1.0 0.3 0.7 1.0 1.11

Cadence Bancorporation

0.4 0.5 0.3 0.2 0.2 1.23

First BanCorp.

0.3 0.3 0.2 0.1 0.2 1.48

OFG Bancorp

0.2 0.2 0.2 0.0 0.2 1.54

Associated Banc-Corp

1.0 0.7 0.2 0.4 0.6 1.61

Sallie Mae Bank

0.9 0.9 1.6 (0.7) 1.6 5.42

Synchrony Financial

10.0 7.9 6.4 1.5 8.5 8.81
DFAST--Dodd-Frank Act Stress Test. Notes: PPNR is calculated as reported pretax income plus provisions. No further adjustments to PPNR were made. The implied provision is calculated by first applying 50% of the aggregate loss rates per type of loan from 2020 DFAST to each bank's loan portfolio to calculate implied loan losses. Table 7 provides further details on those aggregate loss rates. Second, the implied provision is assumed to be 114% of the implied loan losses, in line with the median ratio of provisions to loan losses in 2020 DFAST for banks with a U.S.-based parent. Our rating on First Horizon is unsolicited.

Underwriting And Loan Exposures Will Be Key Factors

The macroeconomic and bank-specific factors discussed above--mainly economic performance, effectiveness of government support, bank allowances, and PPNR--will not be the only factors that determine performance. Each bank's underwriting quality and exposure to industries and individual borrowers most directly affected by the pandemic will also play major roles.

We believe our ratings reflect distinctions in such factors. In fact, the negative rating actions we have taken since the start of the pandemic have focused largely on companies with significant exposures to pandemic-related industries, such as energy. We expect a combination of company-specific attributes and macroeconomic factors to drive ratings in the coming quarters.

Appendix

The following simple mathematical example explains how a hypothetical bank with the following characteristics would need to take a $60 provision:

  • An allowance of $80 at June 30, 2020, that compares to an eventual $100 of pandemic-related losses (80% allowance to pandemic losses)
  • An allowance of 1.5% of loans ($40/$2,667) as of Jan. 1, 2019 (after the CECL Day 1 adjustment)
  • An allowance of 3.0% of loans ($80/$2,667) as of June 30, 2020, after $40 of provisions are taken in the first half of the year

Absorbing the $100 in losses would push the bank's allowance to negative $20. Therefore, it would likely look to replenish that allowance to $40 (the starting point on Jan. 1), costing it $60 in provisions, to maintain an allowance to loans ratio of 1.5%. In that scenario, the bank would still have 60% of its provisions remaining ($40 taken in the first half of the year and $60 remaining).

Table 7

Loan Loss Rates In DFAST Or Implied By DFAST
Bank % of loans

Ally Financial Inc.

6.4

American Express Co.

10.7

Associated Banc-Corp

4.8

BancorpSouth Bank

5.6

Bank of America Corp.

4.7

Bank of New York Mellon Corp.

2.7

BOK Financial Corp.

6.2

Cadence Bancorporation

6.2

Capital One Financial Corp.

15.5

CIT Group Inc.

5.2

Citigroup Inc.

6.7

Citizens Financial Group Inc.

5.6

Comerica Inc.

6.5

Commerce Bancshares Inc.

6.4

Cullen/Frost Bankers Inc.

7.0

Discover Financial Services

17.0

East West Bancorp Inc.

5.1

F.N.B. Corp.

5.6

Fifth Third Bancorp

6.8

First BanCorp.

5.1

First Commonwealth Financial Corp.

5.6
First Hawaiian Inc. 5.1

First Horizon National Corp.

5.2

First Midwest Bancorp Inc.

5.4

First Republic Bank

3.4

Goldman Sachs Group Inc.

8.1

Hancock Whitney Corp.

5.8

Huntington Bancshares Inc.

5.1

Investors Bancorp Inc.

3.8

JPMorgan Chase & Co.

6.6

KeyCorp

5.3

M&T Bank Corp.

5.5

Morgan Stanley

3.5

New York Community Bancorp Inc.

3.4

Northern Trust Corp.

5.7

OFG Bancorp

4.9

People's United Financial Inc.

4.8

PNC Financial Services Group Inc.

5.1

Popular Inc.

5.3

Regions Financial Corp.

6.3

S&T Bancorp Inc.

5.6

Sallie Mae Bank

6.5

State Street Corp.

4.5

SVB Financial Group

4.8

Synchrony Financial

16.8

Synovus Financial Corp.

6.1

TCF Financial Corp.

5.2

Texas Capital Bancshares Inc.

5.9

Truist Financial Corp.

5.1

Trustmark Corp.

5.5

U.S. Bancorp

5.8

UMB Financial Corp.

6.6

Umpqua Holdings Corp.

5.1

Valley National Bancorp

5.6

Webster Financial Corp.

5.0

Wells Fargo & Co.

4.9

Zions Bancorporation N.A.

5.6
DFAST--Dodd-Frank Act Stress Test. Notes: 1) For banks that were part of the Fed's 2020 DFAST, we use the Fed's loan loss rate. For banks not part of DFAST, we apply the loss rates per type of loan from 2020 DFAST to their first quarter 2020 loan portfolio. 2) We used the following loss rates per type loan for banks that were not part of 2020 DFAST: 1-4 family first-lien mortgages (1.5%), junior liens and HELOCs (3.1%), commercial and industrial (7.2%), credit card (17.1%), other consumer (6.5%), and other loans (3.6%). The 2020 DFAST results also showed a loss rate on commercial real estate loans of 6.3%. We instead applied loss rates on owner- and non-owner-occupied commerical real estate of 6.4%, multifamily of 2.5%, and construction 12.0%. 3) Our rating on First Horizon is unsolicited.

This report does not constitute a rating action.

Primary Credit Analysts:Brendan Browne, CFA, New York (1) 212-438-7399;
brendan.browne@spglobal.com
Stuart Plesser, New York (1) 212-438-6870;
stuart.plesser@spglobal.com
Secondary Contact:Devi Aurora, New York (1) 212-438-3055;
devi.aurora@spglobal.com

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