Bank executives in Georgia are assuring customers and investors that they entered into the Covid-19 crisis from “a position of strength” with more capital, less debt, better earnings and higher liquidity than when the industry faced the 2008 recession.
“Twelve years ago, you had companies who had less capital, a lot more leverage and very little flexibility,” said Christopher Marinac, director of research at financial services firm Janney Montgomery Scott LLC. “So it became a very stressful period in 2008 and 2009, because banks were stretched and they didn’t have the same capacity to address issues as the banks today.”
Provisions in the 2012 Dodd Frank Act have led banks to conduct stress tests that have made them more prepared to face this economic crisis. Marinac says banks are also being more transparent and responsive than they were in 2008.
“Since the last crisis, our company has continually taken steps to prepare for an adverse economic environment, including efforts to strengthen management in the key risk areas of capital, credit and liquidity. We routinely deploy stress testing and sensitivity analyses to inform business decisions, and we believe we’re well positioned to sustain an economic downturn, such as we’re facing today,” Synovus Chairman and CEO Kessel D. Stelling told analysts on an April 24 earnings call.
Columbus, Ga.-based Synovus is now the largest bank headquartered in Georgia since SunTrust Banks’ 2019 merger with BB&T Corp. to form Truist Financial Corp.
Speaking to analysts on April 22, Lynn Harton, chairman and CEO of Blairsville, Ga.-based United Community Banks Inc., pointed to the strength of the bank’s board experience, which includes three directors who were senior banking executives during the 2008 crisis.
Robert Hill, CEO of South State Bank, said in an earnings call that, “While this crisis is certainly different than others we have faced, in many ways we have been making decisions in preparation for this crisis for decades.” The Columbia, S.C.-based bank is in the process of merging with Flordia’s CenterState Bank Corp. and will have a significant presence in Atlanta.
Since the last downturn, banks have diversified their mix of loans, moving away from riskier bets.
Between 2009 and the first quarter of this year, Synovus has decreased the number of loans for residential properties by 24% and commercial real estate by 17%, increasing the number of income producing properties in the bank’s portfolio.
Still, stock prices tumbled for Georgia banks beginning in mid-March and first quarter results were already dampened by the pandemic.
“Our January and February, like a lot of people, were really strong. And then we, of course, ran into all the challenges that we’re all experiencing because of COVID-19,” Truist chairman and CEO Kelly King said on an April 20 earnings call.
Banks are preparing for sharp contraction in gross domestic product and high unemployment rates, setting aside funds to cover loans that clients are unable to repay.
Truist just reserved $893 million for expected future losses, up from $155 million for the last quarter of 2019.
“Our asset quality … is actually very good right now, but we know that’s the calm before the storm,” King said on April 20.
About 330,000 consumer clients and 15,000 commercial customers have requested loan deferments in recent weeks, amounting to about 6% of the bank’s total outstanding loans, according to analysis by Janney.
For institutions such as Atlantic Capital Bank and South State, deferred loans account for more than 20% of their totals.
As of March 31, Atlantic Capital had increased the bank’s allowance for credit losses to $27.7 million, compared to $19.4 million at the end of last year. South State set aside $157 million to cover loan losses, an increase of 37% over their allowance at the beginning of 2020.
Credit loss ratios — the potential loan losses compared to the total value of loans — have increased to nearly 1.4% for some banks. Marinac says that while it’s difficult to compare these ratios due to changes in accounting practices, they have been as low as 0.7% in the past, but have typically hovered around 1.25%.
“During a recession that 1.25% reserve goes up anyways,” he said. “You have to fight the fire and so you need more powder in your extinguisher can.”
We could see ratios go up to 1.6% or 2% over the next few quarters, he said.
Synovus reserved $159 million with a credit loss ratio of 1.39% while United Community Bank increased its provisions for credit losses by 35% to $88 million.
United Community Bank saw $8.1 million in net charge-offs in the first quarter, largely due to a $6.4 million loss on a single loan. The bank has about $900 million in loan deferrals, accounting for about 10% of their book.
It’s unclear how many consumers and companies will move from deferments into defaults as we head into a second quarter that will likely see more workers lose their jobs and more businesses shutter.
Marinac says June and July will be an important time as banks assess which clients need to extend deferrals and which customers will simply be unable to pay back their loans.
“It’s very clear that it has been an economic event, that we’re in a recession. And now it’s a question for banks to recognize the problems they have, deal with the problems, and then keep moving forward,” Marinac said. “That’s an easy thing to say, but it’s a multi-quarter process that is required. I would argue that it’s going to take the better part of a year and a half, maybe even two years, to truly go through this.”
Banks are expecting to further increase their credit loss allowances in the second quarter and beyond if current economic conditions continue.
“Clearly, the shutdown has caused the most serious economic stoppage of our lifetimes combined with the most massive government intervention in history and we simply don’t know at this point what the ultimate ramifications for our customer base will be,” United Community Bank’s Harton said on the April 22 call with analysts.
Marinac says it’s the impact on banks’ clients that will be the biggest challenge for the industry. He expects banks will still be profitable in 2020 and anticipates closures will be “few and far between.”
“It’s not a question of survival for the banks, because the capital is strong enough that they can really weather a very, very deep storm here, if it gets that bad,” he said. “The challenge really is understanding how many of these borrowers are indeed not going to pay and dealing with that sooner versus later.”