Banks remain wary about releasing reserves

Sometimes headlines from early in bank earnings season can be deceiving.

JPMorgan Chase commanded attention last month when it said it had released nearly 9% of loan-loss reserves between Sept. 30 and Dec. 31, and some other big banks trimmed the stockpiles they had built since the pandemic recession hit. The reductions perhaps were a sign of optimism about the economy.

However, U.S. Bancorp and Truist Financial held their reserves steady, and they weren’t the only cautious ones. Total allowances for loan losses at 13 of the largest U.S. banks declined on aggregate 4.5% in the fourth quarter from the height of the buildup six months earlier, according to company filings. Some analysts had expected more.

“Some banks are holding back,” said Scott Siefers, managing director and senior research analyst at Piper Sandler, citing the uneven pace of the economic recovery and the rollout of COVID-19 vaccines. Many banks aren’t expecting any return to normalcy until the second half of the year, he said.

Reserves held specifically for consumer debt, like auto loans and credit cards, were largely left untouched across the industry. Speeding up vaccinations is viewed as key to getting the 10.7 million unemployed Americans back to work and to ease concerns of the estimated 7.3 million who are no longer seeking jobs, according to the latest data from the Bureau of Labor Statistics.

Delays in getting shots in arms have dampened earlier, more upbeat outlooks about the 2021 economy.

“One of the keys is that we see a pickup in the rollout of vaccinations,” Bryan Jordan, CEO of the $84.2 billion-asset First Horizon, said on a Jan. 22 call with analysts. “I would say, to date, it’s been woefully inadequate, and it’s got to pick up for us to see a much stronger back half of the year.”

The Memphis, Tenn., bank lowered its reserve for loan losses in the fourth quarter by 3% compared with the third quarter to about $963 million.

Minneapolis-based U.S. Bancorp is looking closely at public health data and the level of state and local limits on business activity and public gatherings, Chief Financial Officer Terry Dolan said on a Jan. 20 call with analysts.

“We end up looking at the uncertainties that exist out there or at least existed out there at the end of the year, and what we want to be able to see is a reversal of some of the restrictions and the reversal associated with some of the COVID cases,” Dolan said.

U.S. Bancorp raised eyebrows when it elected to hold its reserve for loan losses steady in the fourth quarter, said Mike Mayo, a banking analyst at managing director at Wells Fargo Securities.

“The industry as a whole held back from the degree of reserve releases in the fourth quarter,” Mayo said. Releases “could certainly go higher” if the vaccine distribution issues are resolved and consumer outlook improves, he said.

But the timeline for when reserves will return to pre-COVID levels is likely to be pushed out, Siefers at Piper Sandler said.

Vaccinations have been uneven in the U.S. as states struggled to distribute a small supply of doses. More than 13% of Alaskans have received at least the first dose of the vaccine as of Feb. 1, more than double the percentage in Idaho, according to the University of Oxford’s tracking of the data.

There are some signs of optimism as Goldman Sachs researchers said in a Feb. 2 note to clients that 50% of the U.S. population is on track to be vaccinated sometime in May.

The race to get more shots in arms is vital to when the recovery will pick up steam and when banks can release more reserves, according to a December research note from the investment giant Vanguard, one of the largest holders of U.S. bank stocks.

“Under our more optimistic scenarios for vaccine effectiveness, much of the economic loss stemming from the pandemic could be recovered in the next year,” Vanguard researchers said in the report, “while a persistently large immunity gap — possibly a result of a less effective vaccine or an elongated distribution cycle — leaves economies with only marginal progress from current levels.”


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