U.S. bank results to focus on looming loan losses during
coronavirus
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[April 09, 2020] By
David Henry
NEW YORK (Reuters) - How much money will
U.S. banks lose on loans because of the coronavirus recession?
Analysts and investors have been struggling to come up with an answer –
or at least a reasonable guess – ahead of quarterly reports from
JPMorgan Chase & Co <JPM.N>, Bank of America Corp <BAC.N>, Wells Fargo &
Co <WFC.N>, and Citigroup Inc <C.N> next week.
Wall Street estimates have changed dramatically from a month ago. Then,
analysts called for big bank earnings per share to rise in the first
quarter from a year earlier by an average of 2%. Now they see declines
ranging from 14% to 42%, according to Refinitiv data.
That is not just because the impact of the global pandemic is changing
and hard to quantify, but also because of a new accounting standard that
requires banks to estimate losses for the lifetime of loans and set
aside money now to cover them.
![](http://archives.lincolndailynews.com/2020/Apr/09/images/ads/current/debbiesfloral_lda_040220.png)
Those estimates have to be justified to regulators and auditors, and be
credible to investors. But they ultimately rely on judgment: a
pessimistic management team could decide to take much bigger provisions
than optimistic peers at a rival bank, even if they have similar loan
books.
To show the difficulty in guessing how that might play out, UBS bank
analysts created a table showing two outcomes for earnings per share:
one with usual loss reserves, and another that was about one-third
lower, based on their assumptions about the new rule.
"And, the truth is we're probably going to be very wrong," lead analyst
Saul Martinez said in an interview. "The risk is that it is higher."
Goldman Sachs analysts led by Richard Ramsden cut their estimates for
big banks for all of 2020 by 40% this week, all due to additional
loan-loss provisions. Other issues affecting earnings essentially cancel
each other out, they said.
The coronavirus pandemic has put millions of people out of work, shut
off revenue for many companies and led the U.S. government to pour
trillions of dollars into financial markets, corporate bailouts and Main
Street stimulus programs. No one is sure how long the pandemic will last
or what the economy will look like once it is over.
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![](../images/040929pics/busine45.jpg)
A person wearing a face mask walks along Wall Street after further
cases of coronavirus were confirmed in New York City, New York,
U.S., March 6, 2020. REUTERS/Andrew Kelly
![](http://archives.lincolndailynews.com/2020/Apr/09/images/ads/current/graue_20BLAZER_040620.png)
At its core, the uncertainty about bank results reflects uncertainty about the
coronavirus, but the new accounting standard adds another layer of mystery for
banks. Although they have more insight about the financial stress of their
borrowers, and therefore more insight about the economy, they do not have a
crystal ball about the coronavirus.
Bank executives are also mindful that they could send shockwaves through markets
if investors believe they are predicting a protracted and horrid recession, or
are not taking the risks seriously enough.
"It is going to be a tricky balancing act," said Martinez.
Analysts are eager to ask bank executives about assumptions they used for the
new accounting standard, known as CECL, for Current Expected Credit Losses, and
pronounced like the name Cecil. It has been in the works for a decade but only
recently started being implemented. (http://reut.rs/1VYWAvA)
Analysts and investors want to know how high bankers expect unemployment to go,
how that will affect consumer loan delinquencies, and how much exposure they
have to oil companies and sectors that have seen business vanish, like airlines,
hotels and restaurants.
They will also inquire about how effective government stimulus programs have
been.
Spending by the Federal Reserve and Treasury Department could keep loan losses
from being as high as in prior recessions, said Wells Fargo bank analyst Mike
Mayo. He described the first quarter as the most difficult one to predict since
the peak of the global financial crisis in late-2008.
![](http://archives.lincolndailynews.com/2016/Aug/26/images/ads/current/directory_buttons.png)
"You have the biggest accounting change to impact loan loss reserving coming in
the quarter that needs the biggest change in loan loss reserves," he said.
(Reporting by David Henry in New York; Editing by Lauren Tara LaCapra and Nick
Zieminski)
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