This is especially true for longer-term loans like 30-year mortgages, where the potential for losses ticks up because more things can go wrong over a longer time period. “And that’s going to be tricky.”īecause the new rules require banks to estimate foreseeable losses the day they issue a loan, most financial reporting experts believe it stands to reason that banks will have to book more losses compared to what they report now.
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“How does it impact earnings? And how does it impact volatility, and how does it impact all those things that are going to be real drivers in how we value stocks?” said Saul Martinez, managing director at UBS. The problem is, they’re still not sure by how much exactly. The major accounting change will affect many aspects of how investors assess banks’ financial health. “Because once you put that out, it’s out there,” said Crowe LLP partner Chad Kellar. They want to make sure whatever estimates they issue are correct. Publicly traded banks are scrambling to compile the right data to properly comply with the new rule ahead of its 2020 effective date. The lack of detail so far may be frustrating, but isn’t unexpected. Chief Credit Officer Barbara Godin said April 18. “We’ll probably disclose something in the second quarter, but we’re not quite ready to do that yet on the CECL front,” Regions Financial Corp. Others told investors to hang tight and they’d have details later in the year. I’ll give you a range you could drive a truck through, but it’ll be more.” “That number will likely be anywhere from-call it 20 percent to 60 percent-somewhere in that range. Terry Turner, president and CEO of Pinnacle Financial Partners Inc., a Nashville-based bank, on an April 16 call. Other financial institutions acknowledged that their reserves will go up, but didn’t commit to details. He added that the bank was on track, nevertheless, to implement the accounting standard by 2020.
“We’re not ready yet or willing yet to give out any estimates what we expect the financial impact of CECL will be,” said Gregory Dufour, president and CEO of Maine-based Camden National Bank on an April 30 earnings call. When net income falls, earnings and stock price take a hit.Īnalysts clamored for details about the loan loss accounting rules on first-quarter bank earnings calls throughout the spring of 2019. The reserve also is a deduction against a bank’s other assets, so when it rises, net income falls. Investors care about changes in loan loss reserves because when a bank shores up its reserves, it signals that trouble is brewing.
With the notable exception of Wells Fargo & Co., most big banks have signaled that their reserves will have to increase. It’s a significant shift from outgoing rules, which require losses to be tallied only after customers stop making payments. We don’t know what the impact will be day one.”ĭeveloped in the aftermath of the 2008 financial crisis, the Financial Accounting Standards Board’s new accounting rule requires banks to look to the future, consider past experience, and assess the current environment to calculate the losses they expect on loans and set aside corresponding reserves. “We don’t know how it’s going to shake out. “We’re running the clock real close to the end here,” said Matthew Breese, senior analyst at Piper Jaffray & Co. Seven months before publicly traded banks have to adopt the current expected credit losses (CECL) accounting standard, most analysts and investors don’t know what to expect. to JP Morgan Chase & Co., have told investors to expect large boosts in the reserves they must set aside to cover loan losses once they follow major new bank accounting rules.īut nearly all mid-size and smaller financial institutions are still mum about the looming impact of what is considered the biggest change to bank accounting in decades.
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