Citi releases $2bn from loan-loss reserves as macro outlook brightens

Having put aside over $10 billion of earnings over the first nine months of 2020 to cover expected loan defaults caused by the coronavirus crisis, Citi reversed course in the last quarter and released $1.8 billion back into income as its economic forecast improved.

The reserve release was equal to 11% of Q4 revenues. It almost entirely offset the impact of net credit losses, which totalled $1.5 billion for Q4, and a provision build for unfunded credit commitments of $352 million.

Total allowances for credit losses on loans, the sum of quarterly provisions taken by Citi, came to $25 billion as of December 2020, down 6% on three months prior, but still a whopping 95% larger than a year ago.

The outflow from loan-loss reserves was prompted by a revision of the economic forecasts that inform Citi’s current expected credit loss (CECL) model. As of Q4 2020, the lender projects US unemployment to peak at 7.3% in Q1, down from 8.3% previously. The 2020 hit to US GDP was also revised down, from -5.1% to -4%. In addition, Citi now predicts the 2021 recovery will be faster and stronger than its earlier forecasts.


Who said what

“Credit performance remained strong with credit losses of $1.5 billion, down sequentially as well as year over year. And cost of credit was roughly neutral for the quarter, as these losses were offset by an ACL release of $1.5 billion driven primarily by an improvement in our base macro scenario” – Mark Mason, chief financial officer at Citi.

What is it?

Provisions for credit losses are taken out of income each quarter to cover expected shortfalls in payments from loans and other credit instruments.

Why it matters

Citi had taken the second-most loan-loss provisions of all the US systemic banks, besides JP Morgan, over the first nine months of 2020.

The fourth-quarter reversal doesn’t mean it overdid its reserving, though. Speaking on the bank’s earnings call today (January 15), chief financial officer Mark Mason said he expects actual credit losses to peak in 2022. This means some of the provisions put aside earlier last year won’t be utilised for some time to come.

Still, further reserve releases may be on the cards. Why? Because a hefty chunk of Citi’s provisions were the result of “management adjustments” – put simply, discretionary overlays separate from the provisions estimated using its CECL projections. These overlays were conservative by nature. Over time, some of these may be surplus to requirements and released back into income.

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