What Can Be Learned From CECL Early Adopters…

As the advent of the CECL standard rapidly approaches and many financial institutions continue to contemplate the effects the standard will have on reserve balances, it may be helpful for them to glean what they can from the Q1 filings of the largest public institutions in the industry, as well as any other CECL early adopters.

While the financial institutions referenced below may be difficult for some institutions to relate to in size and capital position, the results should help financial institutions understand the segments of their portfolios that are most likely to be adversely affected under the CECL standard.

JPMorgan Chase & Co. 

“The Firm currently expects the increase in the allowance to be in the range of $4-6 billion, primarily driven by Card. This estimate is subject to further refinement based on continuing reviews and approvals of models, methodologies and judgments.”  

Click Here for the entire Q1 2019 10–Q. 

Bank of America Corp. 

“The Corporation expects that, based on current expectations of future economic conditions, upon the adoption of the Standard, the Corporation’s allowance for credit losses may increase by up to 20 percent from its allowance for credit losses as of March 31, 2019, as disclosed herein, with a large portion of that increase being in the U.S. credit card portfolio.”   

Based on the transcript of the earnings call, this would equate to an estimated increase of about $2B, which with their capital position and the capital phase they’re in, is immaterial. 

(BAC) Q1 2019 Earnings Call Transcript 

Citigroup Inc.  

“Based on an updated preliminary analysis performed in the first quarter of 2019 and forecasts of macroeconomic conditions and exposures at that time, the overall impact was estimated to be an approximate 20% to 30% increase in expected credit loss reserves.”  

Click Here for the entire Q1 2019 10–Q.   

Wells Fargo & Co.  

“Based on our portfolio composition as of March 31, 2019, and the current economic environment, we currently estimate an overall decrease in our ACL for loans in the range of $0 to $1 billion. The reduction reflects an expected decrease for commercial loans, given their short contractual maturities, partially offset by an expected increase for longer duration consumer loans.”  

Click Here for the entire Q1 2019 10–Q. 

Goldman Sachs Group Inc. 

“Based on the work completed to date, the current loan portfolio and the weighted average of a range of current forecasts of future economic conditions, the firm estimates that the allowance for credit losses will increase by approximately $600 million to $800 million when CECL is adopted. The estimated increase is driven by the fact that the allowance will cover expected credit losses over the full expected life of the loan portfolios and will also take into account forecasts of expected future economic conditions.”  

Click Here for the entire Q1 2019 10–Q. 

It is important to note that all filings disclosed these results as preliminary. Given the nature of current economic environment, as well as each institution’s portfolio composition and credit quality, results could vary at the actual compliance date.   

While the results varied by institution, it is evident that under CECL, changes in reserve balances will be closely correlated to portfolio composition. Based on the information above, a safe conclusion can be drawn that reserves on credit card portfolios will increase, as will the reserves on consumer/mortgage portfolios as a result of their longer duration. Further, Commercial and CRE portfolios, with their shorter durations, could see reserves decrease. Additionally, it is clear that understanding the risk associated within your portfolio segments and developing more advantageous pricing models to drive profitable loan growth across those segments will be more critical than ever under the reign of CECL. 

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Author Bio

Rob Foreman is a solution consultant with over 10 years of practical experience in the finance and banking industry, and serves as Baker Hill's subject matter expert for CECL. Rob has had broad experience in banking working on high visibility projects, serving both commercial credit and finance as well as accounting areas. Between his experience as an analyst and his responsibilities for the reserve/ALLL process, he brings a true life of loan appreciation to the solution consultant role. 
 
Rob received his Bachelor’s in Finance from Illinois State University and his MBA from the University of Illinois. Rob’s first foray into the technology industry was during his MBA’s global consulting program where he served as consultant to a tech incubator in South Africa.