Analysts project that US banks will post another quarter of generally strong credit performance even as losses continue to climb off pandemic lows and the risks from a long-awaited recession persist.

Across the 25 largest publicly traded banks in the US, consensus estimates forecast a median sequential increase in nonperforming asset (NPA) ratios of just 2 basis points in the second quarter, to a median of 42 basis points, according to data from S&P Global Market Intelligence. Consensus estimates forecast a median increase of just 4 basis points in net charge-off (NCO) rates, to a median of 26 basis points.

Credit loss reserve "builds have been slow thus far as the economy has been resilient and charge-offs remain below historical levels," Jefferies analysts wrote in a July 11 report. They projected NCO rates would increase to 58 basis points for large cap banks in 2024 and 35 basis points for mid-caps — worse than the consensus and implying a considerable drag on earnings, but far better than previous cycles of credit stress.

Credit cycle postponed at least

Analysts broadly expect that banks will post increases in credit provision expenses in the second quarter. Wells Fargo & Co. said in June that its allowance build might accelerate to about $1 billion in the second quarter from $643 million in the first quarter, in part because of stress in the closely watched office sector.

However, realized losses have yet to revert to pre-pandemic levels after a period during which government support helped drive them to historic lows. Across the S&P US BMI Banks index, the NCO rate fell to 20 basis points in 2022 from 43 basis points in 2020, before ticking back up to 29 basis points in the first quarter this year. From 2013 through 2019, the NCO rate averaged 43 basis points. During the Great Financial Crisis, it peaked at 214 basis points in 2010.

A number of analysts have trimmed or pushed out their cyclical projections for credit costs, reflecting a better outlook for the economy even if they continue to expect that a recession will ultimately materialize. "We still expect [2023] reserve builds and a [2024] loss ramp, but we flattened out the [credit loss allowance] build trajectory due to the ongoing strength of the economy," the Jefferies analysts said.

For the 25 big US banks, consensus estimates as of July 4 projected a median increase in NPA ratios of 5 basis points from the first quarter to the fourth quarter, according to S&P Global Market Intelligence data. Consensus estimates for NCO rates by the fourth quarter were similarly not much worse than the deterioration forecast for the second quarter, at a median increase of 10 basis points from the first quarter.

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Not all clear

To be sure, analysts are not declaring blue skies. Economic resilience means that interest rates could stay higher for longer, creating strains on borrowers in the form of unaffordable debt burdens.

Keefe Bruyette & Woods analysts recently trimmed their 2023 and 2024 estimates for credit provision expenses as a percentage of average loans to 22 basis points and 26 basis points, respectively. At the start of this year, the analysts' estimates were 28 basis points for 2023 and 29 basis points for 2024.

Overall, however, the EPS forecasts of Keefe Bruyette & Woods analysts have fallen on a worse outlook for net interest income. While the better credit outlook "does speak to the resiliency of the economy, it also could be interpreted that further downward pressure on EPS estimates from credit normalization could be on the horizon," they said in a July 5 report.

In a report on July 6, analysts at Raymond James wrote, "Positively, credit trends remain strong, though sharply higher rates are likely to create problems longer-term, and we expect an upward bias to credit costs over time."