Bank earnings are benefiting from billions of dollars in reserve releases after last year's aggressive credit loss provisioning and a much-improved economic outlook in 2021.
Among banks with at least $10 billion in assets that had reported earnings as of April 23, roughly two-thirds reported a negative provisioning line item and several more booked zero provisioning, which typically translates to a reserve release.
In total, 40 banks reported negative provisioning to the tune of $11.87 billion in aggregate. Seven banks booked zero provisioning, and 12 banks recorded a positive provisioning figure.
Each quarter, banks report a credit loss provisioning line item in their earnings, which contributes to the bank's pile of loan loss reserves on its balance sheet. If the bank's provisioning exceeds its net charge-offs from bad loans in the quarter, the bank builds its loan loss reserves. But if the provisioning item is lower than charge-offs, the bank releases reserves, which flow to the bottom line and boost the bank's net income for the quarter.
Analysts at Baird Equity Research reported that every bank in their analyst coverage beat estimates, "driven almost entirely by lower credit costs."
The nation's largest bank, JPMorgan Chase & Co., reported the largest negative provisioning figure at $4.16 billion. Including more than $1 billion in net charge-offs, the bank released $5.22 billion in reserves in the quarter, helping the bank deliver a net income print of $14.30 billion, well above consensus and nearly five times the year-ago figure.
JPMorgan could have billions more in reserve releases in coming quarters, management said. CFO Jennifer Piepszak said the bank's current reserves remain $7 billion above the bank's base case economic outlook. While she said the bank would always remain above the base case to account for the potential of an adverse scenario, she said more reserves should be coming if the economic outlook stays at current levels.
"If we continue to see that — if we continue to see labor markets recover, if we continue to see vaccine rollout be successful — we would have future releases from here," Piepszak said on the bank's earnings call.
JPMorgan appears to be far from the only bank with a significant reserve release in the first quarter and expectations for more to come. Several analysts and bankers have pointed to "Day 1 CECL" as a potential target for reserves.
Most large banks adopted the current expected credit loss accounting standard on Jan. 1, 2020, which was before the pandemic but at a time when many economists warned the economic cycle might be nearing its end. With the economy appearing to improve, some analysts have suggested reserves could dip below Day 1 CECL, and JPMorgan and others — even with billions in reserve releases in the first quarter — remain well above those Day 1 levels.
