With the holidays just around the corner, there is no doubt that the celebrations this season will be different. You will have to consider relatives from out of town, how you do or don’t accommodate for social distancing or larger gatherings, or perhaps it’s a reason to uninvite the guests you always wished you could have. This season presents a time of reflection with family and friends. It allows for good introspection on the challenges of the year: how you overcame them, where you fell short, what you could have done better, and where you succeeded. At Valuant, this is why we love earnings season. It’s a time for our clients and some of the greatest companies in America to tell their stories. This year in particular has provided some unique challenges as well as many opportunities.
Our most recent whitepaper, CECL: First Year in Review detailed the impacts and trends related to the allowance for credit losses for the banks that had adopted CECL through June 30th, quarter-end filings. As a brief update below, we aggregated and summarized trends for Q3 2020 filings through 10/26/2020 which amounted to 211 banks, and gained the following insights:
- Net interest margins are down
- Provisions for credit losses are decreasing
- Overall ACL continues to increase but not nearly at the same pace as the prior two quarters in 2020
- Deposits are up in a big way
- Net income growth turns positive to high teen double-digit growth rates so far for Q3 2020
So where are all the defaults and subsequent charge offs?
Well, they are simply not there… not yet at least. Non-performing loans (NPLs) as a percentage of average loans over the prior three quarters have hovered right around 81-82 bps in our sample. Although this now includes PPP loans for the most recent two quarters, the slight increase in NPLs is not materially impacting the NCOs to Average Loans % as this declined 3 BPs from 15 down to 12 in the most recent quarter and matched the 1st quarter of 2020.
The decline in the overall provision for credit losses is quite evident in the most recent quarter with a Provision to Average Loans of 39 bps, down from an average of 81 BPs in the first half 2020. That is roughly $10 billion less in provision for the banks that reported this amount for each of the 3 quarters in 2020 so far!
Finally, with slightly inflated balance sheets due to PPP, KPI’s such as ROAA and ROAE have rebounded back to 1.13% and 10.96%, respectively for these reporting banks as of
Q3 2020 as noted in Exhibit 1.
So what’s the punchline?
Well, it’s how you rationalize most questions and thoughts in this crazy 2020 year… it is a wait-and-see type environment. A couple of things hang in the balance for instance:
- Will there be a second round of stimulus and PPP?
- Who will win the election and what are the ramifications?
- Will there be a 2nd wave of the COVID-19 virus, or perhaps a vaccine?
- How will loan modifications be handled for re-mods or delinquencies?
While there are a number of unknowns, there are undoubtedly several positives as we continue to navigate these uncertain times. Unlike the prior Great Recession, banks have been able to provision and build their allowance reserves while maintaining very strong capital positions well ahead of the anticipated defaults and charge offs due to bank regulatory policy modifications and unprecedented amounts of government stimulus. The 2020 CECL filers also get the benefit of using forecasts which, although volatile during a pandemic and recession, allow for more explicit projections of future losses or even in some cases, projections of recoveries.
Lastly and in summary, as you begin to prepare for this holiday season and start to reflect on the year, we all still have time to impact our story. We are committed at Valuant to help you finish your story for 2020.
Over the coming months, we will continue the CECL, First Year in Review series with an update to our whitepaper and a webinar for the 3rd Quarter’s results in order to help prepare you for year-end reporting.