Accounting Today reported on the financial impact of Current Expected Credit Loss (CECL) to the largest credit card issuer in the U.S., which was a topic of discussion at JPMorgan Chase’quarterly investor presentation. The impact of this accounting change, which requires credit card issuers to tighten their reserves against loan losses, will impact net revenue at all credit card issuers. For Chase companywide, the impact will increase loan loss reserves by $5 billion. To put that $5 billion increase into context, the impact to Chase’s loan loss reserve is more than the total assets of more than 6,000 banks in the United States.
The article notes:
- JPMorgan Chase chief financial officer Marianne Lake said the financial institution expects to have to increase reserves by about $5 billion, or about 35 percent, on day one of its implementation of the current expected credit loss standard, or CECL.
- And while other banks may not see the same 35 percent increase that JPMorgan estimated it could have, people take notice when the nation’s largest bank by assets gives its outlook on the impact of the new accounting standard, which will go into effect on Dec. 15, 2019, for SEC-filing financial institutions.
- “The impact of CECL on financial institutions’ allowance for credit losses will likely vary by institution because CECL is based on many factors, and one of the most important is the types of loans in the institutions’ portfolios,” he said. Credit cards, for example, may have different loss rates than mortgages, so if a financial institution has very few credit cards on its books, its CECL impact may be dissimilar to one that has a large credit card portfolio.
- “In cards today, we have a little over $5 billion in reserves,” Lake said. “And remember that we are currently reserving for about 12 months of losses, while the weighted average life of revolving balances is closer to two years. So obviously, the [CECL] modeling is considerably more complicated than that. But about two times our current reserves seems reasonable.
Mercator Advisory Group covered the topic of CECL recently, and we noted observations by top accounting firms that expect this change might cause large net revenue decreases at credit card issuers. The president of the ABA suggested “the CECL model represents the biggest change-ever in bank accounting.”
Chase’s 35 % increase may be worse for smaller banks. Chase’s charge off rates outperform all banks not included in the top 100 banks in the United States, so you can expect that there may be some severe impact as you go down the credit card food chain. In Q4 2018, bank card issuers outside the top 100 banks charged off at the rate of 7.56%. For the same period, Chase saw net losses at only 2.93%, and they conservatively squirreled away an additional $150 million for the loss reserve.
For a conservative rule thumb on the impact, take a look at the current loss rate and increase it by 40%. For all issuers, it is time to hone collection systems; for others, the impact may be to consider the viability of their card plans.
Overview by Brian Riley, Director, Credit Advisory Sevice at Mercator Advisory Group