Largest Banks Continue to Release Loan Loss Reserves

Within the past week, three of America’s largest banks announced they released loan loss reserves totaling over $9 Billion, citing an improving U.S. economic outlook.  

Analysts at UBS expect banks to continue to release loan loss reserves over the next year, potentially to the end of 2022. Massive government stimulus gets a majority of the credit but is not the only reason for overall economic optimism. There were fewer defaults than originally anticipated combined with a decrease in forbearances according to the latest Mortgage Bankers Survey. The survey showed that the total number of loans currently in forbearance is down to 4.66% of servicers portfolio volume. Further, the government has allowed some banks to be more flexible in defining which loans are considered bad, allowing longer forbearances and grace periods. Click here to read the survey release. 

However, not all bankers are as optimistic with Wells Fargo CEO Charles W. Scharf managing investor expectations by dampening his outlook, “Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low interest rates and tepid loan demand continued to be a headwind for us in the quarter.” 

This trend to cut loss allowances began to be noticed by the press and lawmakers in late 2020 as banks started releasing some loan loss reserves as the outlook for the economy improved. JPMorgan Chase moved $1.89 billion of the roughly $20 billion out of its loan-loss reserves in the fourth quarter of 2020, while Citigroup moved approximately $1.5 billion of its reserves in the same period.

Cuts to Loan Loss Reserves in 2021 Q1

JPMorgan Chase: $5.2 Billion

Bank of America: $2.7 Billion 

Wells Fargo: $1.06 Billion 

Closer to home, Wisconsin banks saw noncurrent loans and leases decrease by 11.44% in the fourth quarter of 2020 from the previous quarter. “As optimism continues to grow surrounding an end to the pandemic, Wisconsin exhibits resilience as the economy shows strong potential to rebound,” according to WBA President/CEO Rose Oswald Poels. 

To view the 4th Quarter WI Asset Quality Report from Banconomics, click here.

By, Alex Paniagua