Higher Provisions for Loan Losses Are Lowering Earnings Growth for S&P 500 Banks for Q3

The Financials sector has been a sector in focus for the market during the past week, as 9 of the 16 companies in the S&P 500 that reported earnings for Q3 during the week were in this sector. Most of these 9 companies were in the Banks industry, including Citigroup, JPMorgan Chase, and Wells Fargo. Despite the recent rise in interest rates, this industry is reporting a year-over-year earnings decline of -13% for Q3. What is driving the decline in earnings for this industry?

One factor contributing to the decline is that companies in the Banks industry are expected to report significantly higher provisions for loan losses in Q3 2022 relative to Q3 2021. Provisions for loan losses have no impact on top-line growth, but do have an impact on bottom-line growth, as they are treated like an expense on a company’s income statement.

Banks dramatically increased their provisions for loan losses in the first half of 2020 in conjunction with the economic lockdowns caused by COVID-19. Banks then substantially reduced their provisions for loan losses during 2021, with restrictions easing and economic conditions improving during the year. Banks have been increasing these provisions again in 2022, but are facing difficult comparisons to the much lower (negative) numbers from 2021.

For example, Citigroup reported $2.26 billion in provisions for loan losses in Q3 2020 and -$192 million in provisions for loan losses in Q3 2021. For Q3 2022, the company reported provisions for loan losses of $1.37 billion.  

FactSet Estimates actively tracks this metric for all 18 companies in the Banks industry in the S&P 500. In aggregate, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) provision for loan losses for these 18 banks is $6.0 billion for Q3 2022, compared to -$4.9 billion for Q3 2021. Based on current estimates, the aggregate provision for loan losses for these 18 banks is expected to rise above pre-pandemic levels in the first half of 2023.

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