Bank Loan Loss Reserves Creep Higher, For Some

Perhaps, no one wants to note this, but it should be noted: At banks — at least some of them — loan loss reserves are creeping up.

As noted in a research report by D.A. Davidson Analyst Kevin Reevey and cited by Seeking Alpha, “the days of negative provisioning are pretty much dead.” At its most basic definition, negative provisioning is a practice wherein loss allowances are estimated at a given period end to be lower than had been previously estimated, thus incurring lower bad debt expense. The implication is that credit risk has improved, and that means the allowances need not be estimated to remain as high.

“Now, they’re going to have to take provisioning expense and build up reserves based on loan growth,” sad the analyst.

For the industry at large, the wild swings are apparent in the fact that total bank loan loss reserves were more than $250 billion just six years ago at around this time. The nadir was $24 billion at 2015’s close. Now, the hole blown in many an energy portfolio has been forcing many energy players to take reserve boosts. The most egregious boost in loan reserves in the latest reporting period was National Bank Holdings, where quarter-over-quarter growth in loan reserves jumped by 39 basis points to 1.43 percent.

The bigger players, according to D.A. Davidson, have actually seen declines in the same metrics. The roster here includes Bank of America, U.S. Bancorp and Wells Fargo.

For the biggest banks, the ability to wait for a funding match, which would mean that money paid back in interest is greater than money paid out on deposits, is largely a matter of having enough capital on the books to be patient. For the smaller firms, the absorption of troubled loans on the books may be largely an inescapable phenomenon. This means that the smallest banks, with the smallest capital buffers, might have to curtail lending even more, which, of course, hits Main Street.