The coronavirus has delayed or cancelled countless plans, but it hasn’t changed the schedule for quarterly financial results from corporate America. Nor has it delayed a new accounting rule known as Cecil.
More than a half dozen commercial and investment banks are due to discuss their first quarter results in the week ahead. They won’t be pretty.
Shareholders of JP Morgan, Wells Fargo, Bank of America and others will concentrate on each firm’s business, how damaged it is because of COVID-19, and most importantly how the financial institutions expect to recover from the economic shock of the virus.
Beyond the bottom line, though, investors will look at loan losses to gauge the financial damage wrought by the virus. Over 16 million Americans have filed for state unemployment benefits in less than a month. In February, companies were quick to cut jobs, eliminating 701,000. That’s on par with what the economy experienced at the depths of the Great Recession.
Lost jobs may lead to miss mortgages, skipped car payments and ballooning credit card balances.
New accounting rules that went into effect in January require banks, and other companies making loans, to hold more money in reserve in case a loan doesn’t get paid back in full and on time. The new methodology is called “current expected credit losses” — CECL. To anthropomorphize an important, but arcane accounting rule, it’s referred to as “Cecil.”
Before Cecil, banks would change quarter-to-quarter how much money they held back to cover bad loans. If the economy was booming and loans were getting paid back, banks would hold back less money, helping boost profits. Cecil requires banks to estimate their bad loans when the loans are made. The hope is to avoid a repeat of the Great Recession when banks were forced to recognize bad loans after they had already spoiled. Instead, Cecil aims to get banks to recognize the risks sooner. Doing so, though, can hold back profits, or deepen losses.
There is a provision in one of the federal stimulus plans passed because of COVID-19 that allows companies to opt out of Cecil for now. Still, Wells Fargo banking analyst Michael Mayo told Reuters, “You have the biggest accounting change to impact loan loss reserves coming in the quarter that needs the biggest change in loan loss reserves.”
Social distancing may be what Americans are practicing, but investors will get to know Cecil very soon.———
ABOUT THE WRITER
Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami, where he is the vice president of news. He is the former co-anchor and managing editor of “Nightly Business Report” on public television. Follow him on Twitter @HudsonsView.
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