As banks start to report second-quarter earnings, they are widely expected to post staggering credit costs. But an optimistic view holds that a second round of large loss provisions might be enough to put the bulk of the pandemic's damage behind them.

To get a sense of where the industry stands, S&P Global Market Intelligence analyzed how much banks have already set aside for loan losses relative to stress-test loss projections. For historical context, this analysis also looked at actual charge-offs the last time there was a deep recession.

Broadly, builds in loan loss reserves in the first quarter brought credit allowances at large banks to levels roughly comparable to those at the start of the 2008-2009 recession. Banks are better capitalized now. But with actual charge-off rates during the 2008-2009 financial crisis higher than what has been projected in recent stress tests, the notion that additional, large loan loss reserve increases are needed to get banks closer to plausible full-cycle losses seems well-founded.

Among a group of 17 banks with more than $100 billion of assets, reserves as of March 31 represented a median 32.4% of loan losses projected over the nine quarters contemplated by the Federal Reserve's most recent stress tests, under the hypothetical "severely adverse" scenario. In that exercise, the clock starts running during the first quarter of 2020, when the recession caused by the pandemic started. At the end of the first quarter of the previous recession — March 31, 2008 — that ratio was 30.4%, based on actual loan losses.

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Nine-quarter loan losses projected for the group in the stress tests generally range from about 4.5% to 7% of total loans at the end of 2019. That could turn out to be too low. For eight of the banks, actual charge-off rates from 2008 through early 2010 were higher. Moreover, charge-offs remained elevated for at least a couple additional years at that time.

Loan underwriting might be more conservative overall than during the last cycle, but the speed and depth of the actual recession triggered by the pandemic appear to have outstripped the stress test's severely adverse scenario. The parameters for the stress tests were formulated before the extent of the COVID-19 threat was clear.

A supplementary analysis designed by the Fed to incorporate conceivable paths for the pandemic found that the impact on capital levels from the severely adverse case would be roughly equivalent to a full V-shaped rebound, even as the recent surge in infections threatens to interrupt a strong initial rebound that appears to have started in May. A double-dip recession, by contrast, would deplete capital levels at several stress test banks to near minimum requirements, the Fed said.

Several banks benchmarked themselves against peers using previous stress test results in first-quarter earnings reports and subsequent presentations. Bank of America Corp. said its relatively low estimated loan losses reflect its cautious underwriting and focus on credit card customers with very high credit scores.

Truist Financial Corp. said its ratio of reserves to projected losses under the 2018 stress tests — the most recent figures available for the company when it reported first-quarter earnings — jumped from 35% to 58% after including fair value marks on SunTrust Banks Inc.'s portfolio resulting from the accounting for the merger. Its standard reserves at March 31 represent 34.1% of estimated loan losses under the 2020 severely adverse scenario.

Massive amounts of federal pandemic aid have relieved pressure on borrowers so far. Notably, in the consumer sector, stimulus checks and enhanced unemployment insurance kept personal income in April and May higher than it was in February. Moreover, strong bond issuance and trading, supported by Fed interventions, are likely to deliver billions of dollars in additional trading profits to large banks over the near term, helping to offset credit costs.

But much of the government's pandemic aid money is due to run out in the coming weeks without additional legislation, and the path to normalcy appears increasingly uncertain as COVID-19 cases continue to spread rapidly across much of the country. Another round of large reserve builds should bring banks much closer to potential losses estimated in stress tests.

JPMorgan Chase & Co.'s roughly $10.5 billion second-quarter provision lifted its ratio of reserves to projected stress test losses from about 36% to about 50%, helping to bring it closer to potential full-cycle credit costs, as expected.