CECL Adoption and Q1 Results Amid COVID-19

As US financial institutions have disclosed their CECL estimates in Q1 2020, we have compiled results from a select number of firms to inform you of the various impacts due to the adoption of CECL and the subsequent economic downturn from COVID-19. We categorize institutions primarily according to asset size.

We track each institution’s allowance for loan loss estimates and total loans reported in Q1 compared to what they had reported in Q4 2019 and Day 1. The ratio of the two figures is the allowance percentage. The allowance percentage build (or release) between Q4 2019 and Day 1 captures the impact of the CECL accounting guidance adoption that shifted from an incurred loss model to an expected loss model. According to their Q1 filings, the change in allowance from Day 1 to Q1 2020 was primarily to reflect increased expected losses caused by the economic downturn due to COVID19. Some institutions also referenced low prices and weakening demand in the oil sector.

We summarize the banks’ results by the following categories and take the simple average of percentage change in allowance (Figure 1):

• The Universal category consists of six globally systemically important banks (G-SIBs) based in the United States with assets over $100 billion. 
• The Large Regional category consists of 10 banks with assets over $100 billion that were not included in the Universal category. 
• The Regional category consists of a sample of 10 banks with assets between $50 billion to $100 billion. 
• The Sub-Regional category consists of a sample of 25 banks with assets between $20 billion to $50 billion. 
• The Small category consists of a sample of 25 banks with assets under $20 billion. 
• The Cards category consists of four financial institutions that were primarily credit card issuers.

The change in allowance ranges across institutions due to a multitude of factors, including but not limited to portfolio composition, asset quality, loan contractual terms, scenario assumptions, mean reversion methodology, and management judgment.

Result details by category

For the Universal banks, the average Day 1 allowance build for the adoption of CECL was 31.08%. The average Q1 allowance build from Day 1 to end of Q1 2020 was 18.66% (Figure 2). Outlier institutions such as BNY Mellon and State Street were excluded because of a lending portfolio composition that was different than the traditional banks in this category.

For the Large Regional banks, the average Day 1 allowance build for the adoption of CECL was 50.41% (Figure 3). The average Q1 allowance build from Day 1 to end of Q1 2020 was 14.04%.

For the Regional banks, the average Day 1 allowance build for the adoption of CECL was 44.35% (Figure 4). The average Q1 allowance build from Day 1 to end of Q1 2020 was 13.28%.

For the Sub-Regional banks, the average Day 1 allowance build for the adoption of CECL was 28.29% (Figure 5). The average Q1 allowance build from Day 1 to end of Q1 2020 was 27.07%. For the Small banks, the average Day 1 allowance build for the adoption of CECL was 51.37% (Figure 6). The average Q1 allowance build from Day 1 to end of Q1 2020 was 27.78%. Note that unfunded commitments and off-balance sheet reserves that may affect the overall allowance for credit loss estimates are excluded from this paper.

For the Cards, the average Day 1 allowance build for the adoption of CECL was 51.58% (Figure 7). The average Q1 allowance build from Day 1 to end of Q1 2020 was 29.09%.