Banks Expected to Boost Loan-Loss Reserves for Third Consecutive Quarter

Bank loan-loss reserves are expected to increase for the third month in a row to as much as $4.5 billion as the nation’s six largest financial institutions finish crunching numbers for third-quarter earnings reports later this week and next. 

The reports from J.P. Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley are also a cue from Wall Street about the situation and outlook of the economic activities and concerns in the U.S., Financial Times reported on Tuesday (Oct. 11).

Banks are anticipated to set aside about $4.5 billion in loan-loss reserves altogether, FT reported, citing analysts’ estimates compiled by Bloomberg.

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Bank reserves that were increased to offset anticipated loan losses due to COVID-19 were largely sidestepped thanks to the flow of stimulus monies. But with loan demand at a high, banks are readying for the possibility that rising interest rates will mean credit losses.

At this point, analysts forecast that the six banks’ earnings per share could see an estimated average decline of roughly 22 % in the third quarter.

“The overall economic outlook has deteriorated somewhat, and therefore it would be natural to expect some incremental pick-up in bank reserving actions,” said Ken Usdin, banking analyst at Jefferies.

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“At this point, there’s not a very high expectation for losses to kick up in an immediate sense. But the bigger question is what does the economy look like over the course of the next year to 18 months,” Usdin added.

Banks are required to have reserves of cash set aside under current expected credit losses (CECL) regulations. 

“The difference in the outlook for the economy from the end of June, compared to the end of September, has clearly weakened. And therefore, according to CECL, reserve building has to go up,” Gerard Cassidy of RBC Capital Markets told FT.