US stimulus supports banks’ credit quality, $70 billion of reserve releases

Bank credit quality materially outperformed early pandemic expectations due to the significant boost to personal income levels as a result of federal stimulus that provided $1.3 trillion in aid to consumers, Fitch Ratings says.

However, banks’ core profitability is likely to remain under modest pressure during much of 2021, as loan growth, GDP and employment remain below pre-pandemic levels.

Real personal income growth for 2020 exceeded 2019 levels by 3.0%, despite a decline in employment and real GDP of 6.0% and 2.4%, respectively. The recently passed $1.9 trillion American Rescue Plan Act is expected to provide approximately $700 billion to consumers in 2021.

Consumers used stimulus payments to reduce debt, with 35% of individuals’ stimulus checks, on average, used to pay down debt, according to a recent US Federal Reserve survey. Consumer deleveraging was particularly pronounced for credit cards.

Fitch expects reserve releases for the US banking industry could exceed $70 billion by YE 2022. This is based on assumptions of unemployment averaging 5.5% during 2H21 and 4.7% in 2022.

Our reserve release projections also assume coverage of noncurrent loans falling from year-end levels of 184% to 130%, given the outsized reserve-build at the onset of the pandemic, and an improved economic backdrop since then.

A stabilizing macroeconomic outlook is supportive for Fitch’s rated US bank universe, with ample liquidity from record deposit growth and solid capital and reserve levels that are more than adequate to absorb loan losses. As of April 15, 2021, 54% of the US bank rated universe remains on Negative Outlook.

However, many US bank outlooks are expected to move to Stable from Negative over the near-to-medium-term, supported by the stabilized economic outlook, strong liquidity and capital levels, and reserve levels more than adequate to absorb loan losses.