US Banks to Set Aside $4bn as Loan Loss Provisions

As Q3 earnings season approaches, the largest US banks are expected to collectively increase their loan loss provisions by about $4.5bn, according to analysts’ estimates from Bloomberg. The banks include JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley. FT notes that this is an indication that the banks are expecting to have to cover higher credit losses from bad loans as a result of economic contraction. FT notes that the KBW Bank Index (a benchmark stock index of the banking sector) has dropped about 22%, 2 percentage points more than the S&P 500 Index, which further reflects investors’ worries that credit losses will outpace increased interest income. Ken Usdin, a banking analyst at Jefferies said, “The overall economic outlook has deteriorated somewhat and therefore it would be natural to expect some incremental pick-up in bank reserving actions.” On the other hand, US bank executives are confident in US credit quality stating that defaults are below historical norms.

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