Will Crisis Strike?
How is the banking industry holding up to the coronavirus crisis?
We’ll have a better answer once second-quarter earnings are released in July. Yet, we got our first comprehensive view of the fallout when the Federal Deposit Insurance Corp. published its latest Quarterly Banking Profile.
The data is from the first quarter of this year — the three months ended March 31 — but still offers a sense for the trajectory of the banking industry.
The major takeaway from the FDIC’s first-quarter data is that banks have yet to absorb the brunt of the crisis. Net charge-offs climbed, for instance, but only by about 15% compared to the year-ago period.
The same is true of noncurrent loan balances, which climbed only marginally. Slightly less than half of all banks reported an increase from the previous quarter in loan balances that are 90 days or more past due. Still, the total figure for the industry overall hovered around a modest 0.93%.
The biggest impact was on loan loss provisions, which climbed by $39 billion, or 280%, compared to the same quarter last year. The net result for banks was that quarterly earnings fell by 70% year-over-year.
Favorable regulatory guidance toward forbearance and loan modifications is moderating the impact on the industry.
“The agencies have encouraged institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of the pandemic,” the Federal Reserve noted in recent guidance to examiners.
“Examiners will not criticize institutions for working with borrowers as part of a risk mitigation strategy intended to improve existing loans,” the Fed continued, “even if the restructured loans have or develop weaknesses that ultimately result in adverse credit classification.”
In short, while the health crisis seems to have moved to a subsequent stage, the economic fallout for banks has yet to begin.
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John Maxfield
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editor in chief of Bank Director
