Accounting & DisclosureBanking

On Track: Banks Adopting CECL Not Derailed by COVID-19

By July 30, 2020 No Comments

Regulators have allowed banks to delay implementing CECL, but most are well on the way to adopting the standard.
 
Banks have been given extra time to implement the FASB’s CECL standard, but most are continuing their push to adopt the measure. The CARES act passed by the US Senate back in March offered banks the option to pause implementation until either the end of the year or the end of the COVID-19 national emergency, whichever came first.

  • According to meeting material presented at NeuGroup’s Bank Treasurers’ Peer Group, the Financial Accounting Standards Board’s current expected credit losses standard has already been adopted by 93% of banks with more than $10 billion in assets. 
  • These banks are also prepared, according to the bank sponsor of the meeting. Loan loss reserves are up by an average of 60% from the beginning of the year.

Trouble. Unemployment and growth statistics point to trouble ahead, one banker presenting to the group said. The sponsor bank itself was “trying to figure out” what the next quarters will look like. Views are “very varied,” the banker said, adding that “everything is going to be impacted by COVID, no sector will be spared.” She said charge-offs “are low now but will increase.” One positive development is deposit growth, which she described as “good.”

Scenario planning. Other banks are also trying to determine the level of COVID-19-related uncertainty in their economic forecast. This in turn has driven the uncertainty in the predictive loan models that are key to the loan-loss reserve buildup for each bank. Most banks use multiple economic scenarios and may make qualitative changes to adjust for so much uncertainty. Many use economic scenarios provided by Moody’s with periodic updates. The methodology has been the focus of frequent questions in bank earnings calls.

As ready as ever? The bank sponsor also said banks were prepared for CECL impacts on their “Day 1” and “Day 2” reserves, the former being related to equity and latter related to quarterly income reports. The sponsor noted that Day 2 reserve build has been equal or greater than “Day 1 charge” for banks. But outcomes could vary depending on “portfolio mix and loss history.”

  • Reserves to loans range from 0.4% to 3.3%, with large US regionals at 1.7% and mid-caps at 1.3%, the sponsor bank’s analysis showed.
  • As such, “banks are acknowledging the likelihood of additional reserve build in 2Q, absent material changes in the current outlook.”
  • The pandemic-related delay applies to both the banks’ Day 1 and Day 2 reserve build, according to S&P Global. 

Noted in most earnings reports. The sponsor bank also noted that most banks had at least one slide related to CECL in their earnings calls, which suggests that there are plenty of COVID-sensitive loan portfolio exposures.

  • The bank said that about 15%-20% of banks provided more detailed loan disclosure breakdowns by loan type in their Q1 calls. Most of that percentage was for larger banks while mid-cap banks “generally disclosed information on higher risk portfolios.” Key exposures include health care, energy, hotel, restaurant, retail, entertainment, travel and transportation, the bank presenters said.
  • On the calls, sponsors noted that most all management teams expressed uncertainty about future economic conditions and offered different takes on their baseline assumptions on the shape and timing of recovery.
  • Many banks assumed negative GDP in Q2 and FY 2020, and high unemployment rates persisting into 2021. 

Forbearance response. The sponsor said banks were seeing a lot of forbearance requests and taking different approaches. For some, a client request was “the only prerequisite for many banks, while other banks are taking a more prudent approach and analyzing need.” Still, overall, there is a desire “to quickly process and assist customers.”

  • Most banks reporting forbearance actions “are reacting to customer inbound requests;” however, some banks are taking a proactive approach and “engaging in active dialogue with clients” about forbearance and client assistance initiatives that are available to them.

Slowdown in requests. Some banks disclosed an early spike in requests that have subsequently tapered off, suggesting that some clients may have foreseen economic difficulties ahead and/or fiscal initiatives are helping or are forecasted to help. This may change as COVID-19 resurges in many US states.

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Antony Michels

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