Loan Loss Provisions: How Banks are Navigating the Crisis

With the economic downturn caused by the coronavirus pandemic, U.S. banks have had to prepare for the likelihood of elevated borrower defaults and have more than doubled their allowances for loan losses. This, on the back of about $115 billion of provisions in the first half of 2020, represented major progress toward absorbing the loan losses likely to result from the economic downturn.

Still, while the pace of provisioning may slow, S&P Global Ratings believes U.S. banks in aggregate are far from done with provisioning for pandemic-related losses.

Even as signs of normalization from the coronavirus-caused economic downturn sprout across countries, the pandemic is pressuring global banking sectors as they balance declining asset quality & creditworthiness with increasing demand for lending.

Oil-related exposures have been causing problems for Nordic banks since the coronavirus crisis broke out, but second-quarter financial results indicate that the region's lenders have otherwise avoided the worst impact of the pandemic.

Analysts also point to Nordic banks as the best placed to resume a normalized dividend policy.

Most of Europe's largest banks posted higher core capital ratios in the second quarter, strengthening their ability to mitigate the negative effects of the coronavirus pandemic, S&P Global Market Intelligence data shows.

Nevertheless, the recent resurgence of COVID-19 infections across the continent has cast a cloud over the prospects for an economic recovery and banks' credit losses, analysts said. "Currently, banks are very well capitalized but there is a great level of uncertainty about how asset quality will evolve in the future," John Cronin, financials analyst at Goodbody Stockbrokers, said in an interview.

Stay up to date with the latest news and insight from S&P Global Market Intelligence on public health, the global economy, its sectors, and commodity markets. This newsletter will be sent every Thursday.

Mid-sized and small Chinese banks set aside more cash as loan loss provisions than they earned as net profit in the first half of 2020, highlighting a rising default risk for locally focused and less-capitalized lenders despite a recovering economy, analysts say.

For the six months ended June 30, the combined loan impairment losses of 20 mid-sized and small Chinese commercial banks listed in Hong Kong totaled 67.82 billion yuan, 42% more than their combined net profit of 47.74 billion yuan, according to calculations by S&P Global Market Intelligence. In the same period last year, these lenders set aside 58.41 billion yuan as buffer against expected loan losses, 19% more than their combined earnings of 49.26 billion yuan.

For banks across the globe, S&P Global Ratings forecasts credit losses of about $2.1 trillion for 2020 and 2021 spurred by the pandemic, with $1.3 trillion this year--more than double the 2019 level. While around 60% of the forecast credit losses will arise in Asia-Pacific, the highest relative increases--more than double on average compared with 2019--will occur in North America and Western Europe.

The duration and severity of the global downturn and the strength of the recovery will shape bank asset quality, and key drivers and differentiators will be effective fiscal support from governments to their economies, as well as banks' forbearance measures and financial reporting transparency.

At S&P Global Ratings we are continuously assessing the economic and credit impact of the COVID-19 pandemic around the world. Subscribe to our Coronavirus Bulletin today and we will ensure you have all our latest research and forecasts as they are published.