A number of banks recently presented at the Barclays Global Financial Services Conference, giving investors and analysts a chance to gauge how they're doing as the third quarter heads to a close. While the financial institutions are expecting lower levels of net interest income due to the rock-bottom interest-rate environment, banks have also seen a decline in the level of loan deferrals, which jumped during the early months of the pandemic.
Among its peers, Bank of America (NYSE:BAC) stands out in my opinion for its progress. CEO Brian Moynihan offered a clear picture of what's left in its deferral bucket, which appears to be less full than those of its competitors.
What's still under deferral?
Moynihan said at the peak, the total volume of loans in deferral was around $55 billion. Now, he said, that's down to about $15 billion, $11 billion to $12 billion of which are first mortgages that are on longer deferral plans. Credit card deferrals got as high as $5.7 billion in total volume, but are now down to $500 million, while little remains under deferral in its auto loan and other segments.
"What you should expect from us after this quarter is that you won't see anything about deferrals other than some discussion about the mortgage because the rest of it's irrelevant," said Moynihan. "It's either in the delinquencies or not at this point."
Although he didn't provide a specific number for remaining deferrals on the commercial side, Moynihan did say that the largest group of deferrals was in the practices solutions group. That includes businesses such as physician and dental practices, many of which shut down temporarily during the pandemic's early months. But now, most of those have reopened, are back to repaying their loans, and are spending money to reduce COVID-19 contagion risk in their facilities, he said. If there is any reserve build in the third quarter, he added, it will be "very modest."
Most banks are seeing their deferral levels come down. JPMorgan Chase (NYSE:JPM) CFO Jennifer Piepzsak said her bank had about $17 billion in deferrals remaining on the home lending side. That's a solid reduction from the roughly $28.3 billion in deferrals in its consumer lending portfolio at the end of the second quarter .
But she also said there were about $42 billion in deferrals when you factor in the home loans that JPMorgan services. Those aren't on its balance sheet, however, and therefore are not as much of a risk for the bank. Piepzsak did not provide an exact update on the $17 billion of deferrals in its wholesale lending book at the end of the second quarter.
Wells Fargo (NYSE:WFC) CFO John Shrewsberry said while deferrals have come down in most categories, its situation in residential mortgages was a bit abnormal. Last quarter, Wells purchased $14 billion of government-backed loans that it was servicing for investors because the loans were delinquent.
At that point, Wells Fargo was advancing payments to investors in those loans even though it wasn't getting payments on them from borrowers, so it might have just been less expensive for the bank to buy them back. However, Shrewsberry said that as a result, the bank now has more than $20 billion of loans like this on its books.
Shrewsberry also noted that a lot of residential borrowers had re-enrolled in deferral programs. "We don't think there's a big credit loss there," said Shrewsberry, "because it's not necessarily a signal that we've got a borrower in distress and we've got great collateral in those programs, but maybe because for no cost, somebody can defer what's probably the largest payment in their monthly stack of bills."
Citigroup (NYSE:C) CFO Mark Mason said at the Barclays conference that roughly 80% of borrowers had "rolled off" forbearance programs. But he added that the bank does expect it will make an additional increase to reserves in the third quarter, although a smaller one than it made in the last two.
Overall, while most banks continue to see declines in deferrals, Bank of America seemed to provide the clearest picture of where its deferrals stood, and looks to have lower levels of them than either JPMorgan or Wells Fargo.
As a minor side effect of the pandemic, investors are getting see just how strong the credit quality is in the loan portfolio of America's second-largest bank. The results of the Fed's most recent stress test showed smaller projected loan-loss rates for Bank of America than for JPMorgan, Citigroup, and Wells Fargo under its "severely adverse" scenario.
Bank of America also arguably has the strongest capital position among the U.S. megabanks in terms of how it's meeting its regulatory capital requirements. These factors could be among those that led Warren Buffett to significantly increase Berkshire Hathaway's position in Bank of America in July, after revealing the conglomerate had gone negative on many bank stocks in the second quarter.