Bank of America, JPMorgan Chase, Wells Fargo report CECL impact

As big banks adopt the Current Expected Credit Losses (CECL) rule, effective Jan. 1, the increase in the allowance for credit losses range from $1.5 billion to $4.3 billion, according to fourth-quarter earnings reports from Bank of America, JPMorgan Chase & Co. and Wells Fargo Co. 

JPMorgan reported an overall net increase to the allowance for credit losses at $4.3 billion, which is at the lower end of the $4 to $6 billion range the bank had previously predicted. Chief Financial Officer Jennifer Piepszak noted during the earnings call that more certainty around the macroeconomic environment and a strong portfolio mix has helped keep the bank’s loss allowance at the lower end.  

However, UBS Securities analyst Saul Martinez questioned the bank’s plan of action if the economic environment were to worsen throughout the year. “If the macroeconomic environment does get worse, is there a point where CECL actually does change the way JPMorgan thinks about pricing and underwriting in that environment?” he asked. 

In response, Piepszak noted the bank does not foresee pricing changes in the near term. “It is true that there is an increased cost of equity in the sense that we’re taking reserves upfront versus through time,” she said. “So, over time, you could see that, but we’re not expecting it in the near term.”

Meanwhile, Wells Fargo reported the allowance for consumer credit losses is expected to be $1.5 billion higher under CECL, Chief Financial Officer John Shrewsberry said during the earnings call, noting that the bank is anticipating “more volatility” under CECL due to “economically sensitive forecast” and the impact of changes in the credit cycle.  

To that end, Evercore analyst John Pancari questioned whether Wells Fargo’s appetite to lend in “certain longer duration consumer areas” has been impacted by CECL implementation.  

“At this point, it’s not likely that we change our appetite for longer duration consumer loans,” Shrewsberry said. “It’s depending on where you are in the cycle; it can cause you to think differently about what your returns are, but it hasn’t closed anything to drop below a hurdle level that says to us, we need to either meaningfully reprice it or where we think whether we’re there in the business.”  

As for Bank of America, Chief Financial Officer Paul Donofrio also noted CECL during the bank’s fourth-quarter earnings call. The bank’s Day One implementation resulted in a $3.3 billion increase in allowance, up from an anticipated $2 billion increase in loss reserves.  

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