Loan Clouds Gather

S&P Global is forecasting bank loan losses to reach $366 billion for the US and Canada over the two years to the end of 2021.

US banks’ loan-loss charges are rising at shocking speed, with the 5,116 FDIC-insured institutions reporting total credit loss provisions of $52.7 billion in the first quarter, a soaring 253% increase from only three months earlier. The second quarter saw the drastic upward trend continuing, with just the top four banks—JPMorgan Chase, Citigroup, Bank of America (BofA) and Wells Fargo—posting $24.4 billion in provisions.

S&P Global is forecasting bank loan losses to reach $366 billion for the US and Canada over the two years to the end of 2021. The Fed’s June stress test on 34 major US banks revealed even gloomier possibilities—losses ranging from $560 billion to $700 billion in various downside scenarios.

The downward spiral directly resulted from deteriorating economic conditions and the implementation of the current expected credit loss (CECL) accounting methodology, which requires banks to recognize all losses expected over the life of a financial instrument. CECL became effective for large listed US banks at the start of 2020 and will be applicable for all the rest in 2023. More than 240 US banks adopted CECL in the first quarter.

Between 1984 and 2007, credit-loss provisions were well below $16 billion for all US financial institutions combined. In the Great Recession, credit-loss provisions spiked from $9 billion in early 2007 to $71.15 billion by late 2008. That number fell back to around $14 billion four years later and remained under that level. Until now.

Bank earnings and bank stocks have plunged. First-quarter aggregate net income for FDIC-insured institutions declined 69.6% from a year earlier. Warren Buffett, a big fan of bank stocks, dumped billions of dollars’ worth in the second quarter, including such luminaries as Wells Fargo, Goldman Sachs and JPMorgan Chase.

Nevertheless, Berkshire Hathaway shelled out $2.1 billion on BofA stock over 12 consecutive trading days, boosting its stake in the banking giant to almost 12% as of August 4. “You can bet on America,” Buffett said in livestreamed remarks to the company’s annual meeting in May, “but you are going to have to be careful on how you bet.” Wise words in any market.