- Key insight: The Iran war did not have a noticeable impact on U.S. banks' provisioning decisions during the first quarter, according to a new Morningstar DBRS report.
- What's at stake: The ongoing conflict is negatively affecting gas prices and inflation, which could put stress on U.S. consumers and corporations and drive banks to set aside more reserves for potential loan losses.
- Forward look: Industry observers will be watching whether U.S. banks opt for a more conservative reserve-building strategy for the quarter that ends on June 30.
During the first quarter, the war in Iran had a bigger impact on reserves at large European and Australian banks than it did on their U.S. counterparts, according to a new analysis by Morningstar DBRS.
Most of the 21 European banks reviewed by the ratings agency took the ongoing conflict into account as they determined loan-loss provisions for the first three months of the year, and Australian banks "took a more cautious stance on the potential credit impact of Middle East tensions." But it was a different story for the 13 U.S. banks in the report, Morningstar said.
Financial results for the first quarter, which ended March 31, showed limited reserve-building at the big four U.S. banks and nine regionals. According to the report, which was published Tuesday, loan-loss reserves at the 13 U.S. banks held steady quarter over quarter, averaging 1.52% of total loans, and were down modestly from the first-quarter 2025 average of 1.63%.
The lack of reserve-building reflected the generally positive tone that U.S. banks expressed during their first-quarter earnings calls, according to Maureen Levelis, a Morningstar DBRS analyst.
"U.S. banks are taking a wait-and-see approach," Levelis told American Banker. "They're not building reserves aggressively because the credit metrics haven't changed. I think in general the resilience of the U.S. economy is giving banks a lot of confidence to stay steady in provisioning."
Now in its 14th week, the conflict in the Middle East has driven up oil and gas prices and fueled inflation in the U.S. and elsewhere around the globe. But so far, credit quality remains strong, and net charge-offs remain steady.
According to an S&P Global Market Intelligence report, the majority of large U.S. banks reported provisions below analysts' expectations for the first quarter. In fact, of the 15 U.S. banks with more than $100 billion of assets that reported first-quarter earnings through April 24, nine had provisions that fell below analysts' consensus estimates, and 10 reported lower-than-expected net charge-offs, "demonstrating resilient credit performance" across the sector, the report said.
Of the four big U.S. banks, only Citi's first-quarter provision — $2.81 billion — came in higher than expected, S&P said.
Among the 13 U.S. banks included in Morningstar's analysis, net charge-offs averaged 0.45%, while nonperforming asset ratios were 0.65%, "underscoring management teams' consistent messages on earnings calls: geopolitical risk has risen, but it has yet to translate into observable, broad-based credit deterioration," the report said.
In April, some bankers explained their decision-making process for not building reserves.
At JPMorganChase, there was "a very conscious debate" about accounting for potential downside scenarios, "given everything that's going on," Chief Financial Officer Jeremy Barnum told analysts during the bank's first-quarter earnings call. The bank ultimately decided that its current reserves were sufficient and that it would take a "wait-and-see" approach, he said.
Wells Fargo's strategy was similar. Chief Financial Officer Mike Santomassimo told analysts during Wells' first-quarter earnings call that the bank was adequately reserved at that moment.
"When we look at all the different scenarios … based on what we think can happen as a result of what we're seeing, we think the scenarios cover anything that's sort of probable at this point," he said. "So we've maintained that significant downside weighting, and then we'll keep it that way at this point for the quarter, and we think that's appropriate for where things stand."
In addition to U.S. banks, Morningstar's analysis looked at banks in Europe, Australia, Canada and Japan. In general, banks in regions that are less vulnerable to rising energy prices and supply-chain disruptions, such as Japan, reported fewer increases in provisions.
Banks in the United Kingdom reported "the most significant increase in provisions," as four of the five U.K. banks attributed their higher provisions to the Middle East conflict, while noting that the impact was manageable for now, the report said. Three Australian banks — National Australia Bank, Westpac Banking Corp. and Commonwealth Bank of Australia — reported "notably higher" loan-loss provisions, as banks in that country "took a more cautious stance on the potential credit impact of Middle East tensions," Morningstar's report said.
In Canada, banks reported a slight uptick in first-quarter provisions for performing loans, citing a deteriorating macroeconomic outlook as well as uncertainty about the length of the war.
Observers will be watching whether banks maintain a general positive tone in July when they issue their second-quarter earnings reports.
"I'm surprised the consumer has held up so well," Levelis said. "If sustained inflation and higher oil prices start stinging the consumer, I think things could change."
