Banks were already feeling the impact from COVID-19, and this new accounting rule doesn't help

Banks in Arizona and across the nation were facing headwinds even before the coronavirus pandemic hit, and a new, more-rigorous accounting rule isn't helping things.

Banks could face eroding profits on a scale they haven't seen since the Great Recession. For depositors and other bank customers, this is a possible cause for concern — or at least a reason to re-evaluate your banking needs.

Banks aren't in trouble. The number of banks on the FDIC's problem list eased to 51 at the end of last year — a 13-year low and representing only about 1% of all companies. No banks failed in 2018, only four did so last year, plus two so far in 2020 through May. The FDIC doesn't identify the institutions on its problem-bank list.

"The banking industry remains strong," said FDIC Chairman Jelena McWilliams in February, when the agency revealed that banks with deposit insurance, the overwhelming majority, earned a combined profit of $55.2 billion.

Profit squeeze is on

Yet the October-December report marked a second straight quarter of declining profitability, and then the coronavirus pandemic hit, pushing the nation into a recession and raising the specter of loan delinquencies, defaults, bankruptcies and other fallout.

In addition, interest rates have dropped in recent months, narrowing the spread between what banks earn on loans and pay on deposits.

The FDIC was scheduled to report the industry's first-quarter financial results around the end of May, but that has been pushed back to mid-June to give some banks more time to prepare their numbers amid the outbreak.

Profits already are tumbling. Three of the nation's biggest banks — Chase, Wells Fargo and Bank of America — reported combined net income from January through March of around $6 billion, down from about $21 billion in the same period one year earlier. Those three also are the biggest banks operating in Arizona.

The economic ramifications of the coronavirus outbreak weren't fully felt in the first quarter. The impact for April through June will be larger.

Accounting rule in force

Many banks already have started to adjust their earnings lower, reflecting a new accounting standard that requires them to estimate credit losses over the lifetimes of their loans, not just as losses accrue. It's a big change that will require executives to factor in future losses under various scenarios and incorporating many factors.

As Bank of America explained it, these factors can include changes in unemployment rates, real estate prices, Gross Domestic Product, corporate-bond spreads, long-term interest-rate forecasts, the competitive landscape, regulations, lending policies and more, along with prior experience with past-due loans.

For the first quarter of 2020, Chase, Wells Fargo and Bank of America included roughly $17 billion in combined provisions or charges for credit losses, well above the $3 billion or so that they had reported one year earlier and explaining much of the profit erosion. The new loss provisions reflect not just the accounting-rule change but also lower interest rates and the gloomy economy ushered in by the pandemic.

Few delays ahead  

No wonder FDIC Chairman McWilliams in a March 19 letter asked the Financial Accounting Standards Board to let banks delay implantation of the new rule for credit losses.

Most publicly-traded banks were required to adopt it at the start of 2020. However, when the pandemic hit and Congress and the White House enacted the CARES Act in late March, banks were given the option to delay, said Christine Klimek, a spokeswoman for the nonprofit Financial Accounting Foundation, which oversees the accounting board.

To her knowledge, only about three dozen small banks that were subject to the new rule have opted to delay.

Incidentally, if the economy rebounds quickly, as many observers expect, those credit-loss charges could be lowered, improving the profitability outlook.

Banks adjust to new reality

Banks, like most other businesses, have had to alter their operations as a result of the coronavirus pandemic.

For example, Western Alliance Bancorp, the largest banking company headquartered in Arizona and the No. 4 bank overall for deposits in the state, said it has made many adjustments, including eliminating business travel, requiring employees to work from home if they can, forming a COVID-19 business-continuity task force and offering flexible loan-repayment options where appropriate. 

That's in addition to tighter underwriting standards and limited new-loan issuance to businesses in higher-risk industries including transportation, travel, lodging, entertainment and retail. 

Many banks have reduced hours, closed certain branches, restricted access to safe-deposit boxes or taken other actions that have proven unpopular with some customers. 

Analyzing your bank

All of these disruptions might provide a good opportunity to re-evaluate your bank.

Has the company cut its business hours or closed branches to your annoyance? Do you find the website and smart-phone apps easy to use? Does the bank charge fees for overdrafts, low balances or other reasons? Are interest rates on credit cards or other loans reasonable? Can you earn a few more pennies in interest by going elsewhere?

Most customers don't need to worry about the safety of their money, even if bank profits decline. On up to $250,000 in deposits at an insured bank, your money is fully protected against loss by the FDIC (similar coverage applies at credit unions).

This basic insurance amount can be expanded if you own different types of accounts, such as retirement and non-retirement money. It's also easy to augment coverage beyond the $250,000 limit by simply moving some money to another institution.

But customer satisfaction looms as a factor, especially now that more people are forced by social distancing to conduct most or all of their transactions online.

“With fewer customers visiting branches, it will be important for retail banks to replace the in-person service they would have provided with personalized services delivered instead through digital channels,” said Paul McAdam, a senior director at J.D. Power.

In the researcher's latest banking-satisfaction report in late April, digital-only customers described themselves as less satisfied than those who visit branches periodically — or at least, used to do so.

Reach Wiles at russ.wiles@arizonarepublic.com.