Citizens, US Bank stock coffers for expected losses

Citizens Bank and U.S. Bank are the latest financial institutions to set aside additional capital in anticipation of increased credit losses from the COVID-19 crisis.

Citizens Bank announced today that it increased allowance for credit losses 66% year over year to $2.2 billion, which includes a $451 million increase recorded for the Jan. 1 adoption of CECL and a $463 million reserve build for COVID-19 impacts. From a funding perspective, the bank’s $50 billion of available liquidity as of April 15 serves as an “ample” cushion to weather the pandemic.

For the bank’s auto division, Citizens One Auto Finance, total allowance for credit losses clocks in at $278 million. The lender’s portfolio remained relatively flat YoY at $12.2 billion. Net charge offs were up 11 basis points YoY to 0.88% of the portfolio.

Moving forward, Citizens One is tightening its credit underwriting standards in light of the coronavirus pandemic. As a result, approval rates have dropped from “mid 40% to mid 30%” the lender noted in its earnings report.

For future originations, the prime auto lender is raising minimum Fico scores, lowering loan-to-value, and lowering debt-to-income, particularly for 84-month loan terms. Further, Citizens One has suspended repossessions indefinitely due to the closures of auction houses.

U.S. Bank, too, has increased its allowances for expected credit losses to $993 million “driven by deteriorating economic conditions caused by the impact of COVID-19 on the U.S. and global economies,” according to the first-quarter earnings presentation released this week. Allowances for credit losses were up $600 million compared to last quarter.

The Minneapolis-based bank has already seen an uptick in net charge-offs this year, which increased 5 basis points to 0.52%, largely due to the suspension of involuntary repossessions related to the pandemic.

Loan performance, on the other hand, improved compared to last quarter, with 30- to 89-day delinquency rates dropping 3 bps to 0.78%, although there is an expectation that figures relating to nonperforming loans and delinquencies will continue to rise due to the economic uncertainty.

And while U.S. Bank’s CECL provisions should cover expected losses over the lifetime of loans on the bank’s book of business, volatility could increase those allowances.

“If we had perfect insight into exactly what was going to happen and we knew exactly how bad GDP and unemployment and everything else was going to get, the CECL process would take that into consideration,” said Terry Dolan, the bank’s vice chairman and chief financial officer, during the earnings call.

“We believe that [the COVID-19 impact] is going to continue to evolve really over the next several quarters. And that’s going to impact the reserve build over time,” Dolan added.

U.S. Bank had an outstanding auto portfolio of 19.2 billion at the end of the quarter, concentrated on prime and super prime customers. Retail auto loans averaged a 784 Fico score, with a loan-to-value ratio of 100%; lease contracts had a 781 Fico with a 92% LTV.

Shares of both banks were trading up today at market close. Citizens Financial Group Inc. [NYSE: CFG] increased 15.46% to $19.87, and U.S. Bank [NYSE: USB] rose 10.32% to $35.06 per share.