Top US and Europe Banks Set Aside $139B as Loan Loss Provisions As Bad Debt Losses Could Surpass $880B by 2022

According to the research data analyzed and published by Comprar Acciones, the biggest lenders in the US and Europe are on course to record some of the biggest loan losses and deferred loans in 2020.

At the end of H1 2020, the top 5 US banks reported that borrowers could default on up to $104 billion in debt. It was the first time since 2010 when potential losses from loans had crossed the $100 billion mark. On the bright side though, these expected loan losses are still below the 2010 figure which soared to almost $150 billion.

Furthermore, they represent a minor fraction of the five banks’ total loan portfolios which were worth about $4 trillion at the end of H1 2020.

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By the end of H1 2020, the top four US banks had reached $151.5 billion in deferred loans according to Bloomberg.

Wells Fargo and Bank of America Total Credit Loss Allowances Top $20 Billion Each

During Q2 2020, all of the top five US banks reported massive profit decline because they had to set aside loan loss provisions.

Bank of America set aside $5 billion during the period to add to its loan loss provisions. In total, its loan loss provisions at the time amounted to almost $20 billion. It is worth noting that the figure had nearly doubled from $10 billion in 2019.  Also, its profits nearly halved from $7.3 billion to $3.5 billion year-over-year (YoY).

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Citigroup’s profits dropped by 73% during the same quarter as the bank set aside $5.6 billion for potential loan losses. In comparison, it had set aside $7 billion in Q1 2020 and $2.1 billion in Q4 2019 according to Statista. Also, the bank is especially susceptible to credit card delinquencies as it is the third largest issuer in the US. At the end of June 2020, it had offered forbearance on two million credit card accounts, equivalent to 6% of credit balances.

JP Morgan Chase set aside a record of $8.44 billion in Q2 2020 for potential future loan defaults, adding to the $8.28 billion it set aside in Q1 2020. That coincided with a drop of 51% YoY in profits, which reached $4.7 billion. According to CBS News, about 55% of JP Morgan’s expected loan losses, almost $18 billion, came from its credit card segment. That comes as no surprise given that the bank is the top US credit card issuer and one of the largest globally.

Wells Fargo added $9.6 billion to its loan loss reserves in Q2 2020, up from the Q1 total of $4.0 billion. Its total allowance for credit losses at the end of June 2020 was $20.4 billion, a significant increase over the $12 billion reported in Q1 2019.

On the other hand, US Bancorp set aside $1 billion in Q1 2020 and $1.74 billion in Q2. Comparatively, its loan loss provisions for Q1 2019 totaled $377 million, and $1.5 billion for the entire year. The bank’s total credit loss allowance at the end of Q2 2020 was $7.89 billion according to S&P Global.

In Europe, HSBC, the largest bank by assets set aside $3.83 billion in Q2 2020 compared to $2.8 billion in all of 2019. It warned that its loan losses could top $13 billion by the end of 2020. Total credit impairment provisions for H1 2020 surged to $6.9 billion, compared to $1 billion in H1 2019.

15 US Banks and 32 European Banks Set Aside $139 Billion as Loan Loss Provisions

According to data published by Citigroup, the top 15 banks in the US had set aside $76 billion as provisions for loan losses at the start of August 2020. The situation was no different in Europe as the top 32 banks had set aside €56 billion.

The cumulative total of $139 billion was the highest on record since 2009 when the banks reached $186 billion in loan loss provisions.

Consultants at Accenture projected that by the end of 2022, loan losses from bad debts could soar to a whopping $880 billion. The estimates are based on a sample of 100 US and European banks.

According to the report, banks in the US could face up to $320 billion in loan losses by the end of 2020. For some perspective, it is noteworthy that US banks set aside $55 billion in 2019 for potential loan losses. In Europe, banks had set aside a total of $90 billion in 2019. Their loan loss figure could go up to $460 billion in 2020.

Globally, the report projects that banks will set aside up to 2.4% of existing credit books for this purpose.