U.S. Banks 3Q20: Materially Lower Loan Loss Provisions Drive Improved Earnings

DBRS, Inc. (DBRS Morningstar) published a commentary highlighting the 3Q20 results of U.S. banks. Following the massive reserve builds in the previous two quarters, 3Q20 results included modest reserve builds, or reserve releases in certain cases, reflecting the procyclical nature of the Current Expected Credit Loss (CECL) accounting standard that requires banks to recognize expected life-of-loan losses on day one.

Key highlights include:

-- DBRS Morningstar views 3Q20 results for U.S. banks as solid in the context of the challenging operating environment and better than our expectations.
-- The quarter was characterized by abnormal loan and deposit trends, continued net interest margin compression that was largely offset by strong fee income, with a material decline in loan loss provisions driving significantly improved bottom line results.
-- While we expect the earnings power of banks to continue to be constrained, we view the strength of bank balance sheets as providing a significant offset. That said, positive ratings pressure is highly unlikely for most banks under our coverage at least in the near term, given the challenging operating environment.

“Overall, we view current asset quality metrics as providing limited visibility into future credit performance, given the unprecedented government stimulus and payment relief measures that have been implemented. However, we note that loan deferral statistics, excluding COVID-sensitive hotspots, reflected solid improvement. During 3Q20, non-performing loans and criticized exposures trended higher, while net charge-offs and delinquency metrics remained at very low levels,” said Michael McTamney, Vice President.

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information, visit www.dbrsmorningstar.com or contact us at [email protected].

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