The specter of CECL looms over banks’ 1Q calls

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Add loan-loss accounting to the list of items likely to come up during quarterly conference calls.

With conversion to the current expected credit loss, or CECL, standard set to begin in January, investors are expected to renew their focus on banks' preparations for the change — and any costs associated with the switch.

A growing number of banks are running parallel loan-loss calculations, so detailed discussions about CECL’s effect on capital, loan-loss reserves and earnings are sure to follow, said Robby Holditch, a director with the regulatory accounting team at Moody’s Analytics.

“I truly expect those conversations to pick up,” Holditch said.

While there “hasn’t been much specificity” in banks’ CECL comments to date, analysts are starting to work on their modeling for earnings into 2021, “so we are getting into forecast windows where CECL will be implemented,” said Joe Gladue, director of research at Alden Securities.

“I think there is a reasonable expect that [CECL] questions should start coming up more frequently,” Gladue added.

Banks that file with the Securities and Exchange Commission are scheduled to convert to CECL by Jan. 1.

Analysts aren't the only ones with CECL questions, said Mayra Rodriguez Valladares, a managing principal at New York consulting firm MRV Associates.

"Bank examiners started having conversations with banks last year, so this puts pressure on banks to work on CECL implementation," Valladares said. "Moreover, rating agencies are also asking questions about banks' readiness, which in turn puts more pressure on banks."

JPMorgan Chase and Citigroup have already provided detailed estimates of CECL's likely impact on their financials.

At an investor day in February, Chief Financial Officer Marianne Lake predicted that Chase, the nation’s largest bank with $2.6 trillion of assets, would have to add about $5 billion to its loan-loss allowance when it converts. The total could climb as high as $10 billion if the economy slows.

“If recessionary indicators are indeed flashing red, then obviously our estimates of lifetime losses would be larger,” Lake said.

John Gerspach, who recently retired as Citi’s CFO, told investors in January that the $1.4 trillion-asset company believes its allowance, which totaled $12.4 billion on Dec. 31, could increase by as much as 20% because of CECL.

As more publicly traded banks provide CECL disclosures, privately held institutions and credit unions are likely to start feeling more pressure to do the same, industry observers said.

“Once we begin to see more public disclosures, that’s going to drive conversations at the nonpublic filers about what they’re doing,” Holditch said.

Not every bank is rushing to disclose.

While Standard AVB Financial in Monroeville, Pa., is running parallel calculations, Timothy Zimmerman, the $972 million-asset company's CEO, said he has been advised to take it slowly when it comes to CECL estimates.

“Our attorneys are being very conservative,” Zimmerman said. “The estimates we put out in the first quarter won’t look the same in the third quarter.”

That comes as no surprise to Gladue.

“There’s no real benefit to them in getting real specific now, and there’s some downside,” he said.

At some point, however, Gladue said bankers are going to have to start making “their best guesses” about CECL. Indeed, the SEC requires public institutions to discuss potential effects of new accounting standards in their filings.

While a spokesman declined to comment, Wesley Bricker, the SEC's chief accountant, indicated that the agency wants CECL disclosures to be as informative as possible.

“Anticipated impacts of the standard may need to be communicated externally as well,” Bricker said. “Nobody likes surprises.”

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