US banks’ loan provisions could be double rate of European rivals

US banks’ profits will be hit twice as hard by provisions for loan losses as a result of the pandemic than their European peers, consultants at Accenture predicted, in a study that upends the traditional wisdom of European banks’ relative weakness.

The Accenture analysis — which comes as European lenders prepare to follow US rivals in reporting massive second-quarter provisions for future bad debts — predicts loan loss charges of more than $880bn across a group of some 100 US and European banks from 2020 to 2022 in a severe scenario, as the pandemic cripples individuals’ and companies’ capacity to service debt.

The $427bn of loan loss charges predicted for 58 US banks over the three-year period equates to about 10.2 per cent of their estimated average 2020 loan books, Accenture’s data shows. The 50 European banks in the study are expected to take loan loss charges of $455bn over the same period which, by contrast, are equal to roughly 4.6 per cent of their 2020 loan balances.

Alan McIntyre, Accenture’s global head of banking, said the US loss rates were higher because American banks “tend to take more risks in areas like credit card lending, although . . . US banks also tend to get higher returns”.

US banks’ tendency to be more conservative in their assessment of future losses could also leave them with higher loan loss charges, Accenture said.

New accounting rules compelling US banks to estimate the lifetime losses of all loans are also a factor, since European banks must only consider lifetime losses once a loan deteriorates beyond a certain level.

The contrast in the two approaches is already evident. In the US, JPMorgan Chase, Wells Fargo, Bank of America and Citigroup together took loan loss charges of $33bn in the second quarter. Analysts expect the top 30 or so UK, Swiss and EU lenders will provision less in total than those four alone.

Mr McIntyre said US banks also faced more uncertainty than their European rivals, because of widespread forbearance programmes which have given borrowers the opportunity to take payment holidays without dinging their credit scores.

“It’s worse in the US because of the reliance on credit scores,” Mr McIntyre said, describing a situation where US banks are making new lending decisions without a clear picture of which potential customers may be in distress.

Still, the Accenture study is not all bad news for the Americans. The estimated loan losses will take a smaller chunk out of US banks’ capital than the Europeans’, because loans make up a smaller portion of US banks’ total balance sheets. US banks also typically have higher profitability, enabling them to make back a little more of the money they lose.

The US banks studied by the consulting firm included three with more than $1tn dollars of assets; two with $500bn-$1tn; five with $100bn-$500bn; and 48 with less than $100bn. The European banks tended to be larger: 10 of them have more than $1tn of assets, six fall in the $500bn-$1tn category, 10 in the $100bn-$500bn range and 24 below $100bn.