As uncertainty around the coronavirus pandemic continues, banks are steeling themselves for a difficult fall and winter.
Though many had hoped in late March, when Congress passed the massive $3 trillion CARES Act relief package, that the economy would be on a sharp rebound by mid-August, it’s clear that’s no longer the case, and banks—big and small, local and national—are preparing for a wave of defaults in the months to come.
“There’s so much uncertainty out there,” says Jonathan Briggs, a banking analyst and managing director at New Orleans-based Chaffe and Associates. “No one knows what’s coming.”
Second-quarter earnings reports of lending institutions show just how much banks have squirreled away, compared to previous periods, to cover what is expected to be a lot of bad debt in the near future.
B1BANK set aside $5.4 million in the second quarter, compared to $1.8 million in the first quarter and $1.3 million in the second quarter of 2019.
Investar Bank set aside $2.5 million in the second quarter compared with just $400,000 in the second quarter of 2019, while Red River Bank increased its loan loss reserves by $1 million in the second quarter over the previous quarter.
Larger, regional institutions like Hancock Whitney set aside far larger amounts—$553.7 million in the first two quarters of the year to cover possible loan losses, compared with just $26.1 million in the first half of 2019.
Mega national banks, namely JPMorgan Chase, set aside a whopping $8.4 billion in the second quarter of 2020, compared with $1.4 billion in the fourth quarter of 2019.
“The banks are just preparing,” Briggs says. “They want to be ready for what is coming. Most of them are taking the conservative approach and reserving now.”
So far, thanks largely to an artificial economy that has been propped up for months by federal assistance, local bankers say they are not yet seeing defaults in any significant numbers.
“But we know there is pain out there and we know eventually we will see some of it so we want to prepare ourselves,” b1BANK President and CEO Jude Melville says. “You may not really see some of the challenges come to fruition until 2021.”
That could change for the better, depending on if and when Congress comes through with a fourth stimulus package and, of course, the trajectory of the pandemic.
“So much just depends on when the recovery takes hold,” says Red River Bank President and CEO Blake Chatelain, who predicts commercial real estate and energy loans will be among the most vulnerable. “There is so much stimulus in the system right now. Hopefully, that will see us through until the reopening but it’s hard to say.”
In the meantime, banks are hunkering down for what Melville compares to wartime conditions.
“The crisis isn’t a crisis anymore,” he says. “It’s like being at war. It’s just the way things are going to be some time.”
(Editor’s Note: This story has been revised from an earlier version to correct the name of the firm with which Jonathan Briggs is employed. Daily Report regrets the error.)
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