Inside Financial Services

Consensus Estimates for Banks’ Loan Loss Provisions are Too High

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The consensus estimate for the loan-loss provisions at publicly traded banks with market caps over $150 million shows that analysts expect a gradual decline over the next seven quarters. That’s almost certainly not going to happen; rather, loss provisions are apt to decline much more quickly. Why? The new CECL rules on loss-provisioning. Those rules require banks to essentially front-end their loss expectations in the quarter that the loan is written and then revise their loss assumptions in subsequent quarters. That means that during this credit downcycle at most banks, loss provisions have already largely been fully booked, and won’t just decline gradually from here, but rather look more like a stair-step down, with the biggest step down being in the first or second quarter of 2021. That will likely be a big positive surprise for bank investors.