Bank loan loss reserves are high. What that means for the economy and earnings

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Bank loan loss reserves are high. What that means for the economy and earnings

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for overall bank earnings is one of ongoing resiliency,” Ruscitti added. Lauren Goodwin, chief market strategist and economist at New York Life Investments, agreed that a potential slowing or reversal of loan loss reserves would be positive for bank earnings but said she is cautious on bank profitability more broadly. The yield curve is still inverted, meaning that short-term interest rates are higher than longer-term rates. That’s tricky for banks that typically borrow short to lend long. “It’s hard to know what enough [reserves] is. I think the challenge for banks is that as long as the yield curve is inverted, it’s just really hard to be profitable,” Goodwin said. To be sure, banks may need to increase their loan loss reserves if the economic

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gets worse. The ratio of those reserves to total loans is still well below the levels it reached in the last two U.S. recessions, according to MRB. “Even though banks are overprovisioned in general, they’re not highly provisioned relative to say a meaningful economic downturn,” Unlimited’s Elliott said. Pressures on the commercial real estate sector — in particular office buildings — also cloud the

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for banks. Some regional banks have heavy exposure to that market, which has seen buildings in major city centers sell at significant markdowns in recent months. “If anything happens in commercial real estate, it won’t happen the way we think,” Goodwin said. Commercial real estate could be less of a concern for the biggest banks and the so-called super regionals, which is the preferred way to play the sector for MRB, Ruscitti wrote.

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