Allowance for loan ratio remains stable
The allowance for loan and lease losses (or ALLL) for all US commercial banks remained stable at 1.31% of total loans for the week ended April 24. This is according to the latest data released on May 1 by the Federal Reserve. The ratio was at the same level as the previous week. It was the same for both large and small bank segments.
The total loans for all US commercial banks continue to grow. You can read more about loan growth in US Banks’ Total Loans Continued to Rise in April 2015.
The firmwide loan loss allowance to total loans was 1.52% for the first quarter of 2015 for J.P. Morgan (JPM). The ratio for that quarter was 1.51% for Wells Fargo (WFC), 2.38% for Citigroup (C), and 1.57% for Bank of America (BAC).
Together, these four banks form ~27% of the Financial Select Sector SPDR ETF (XLF). Citigroup maintains a higher allowance due to its significant global operations. It forms ~7.2% of the iShares U.S. Financial Services ETF (IYG).
The ratio is declining over the long term
All banks maintain loan loss allowances to cover estimated potential losses in their loan portfolios. As the aftereffects of the subprime crisis continue to decline, the allowance for loan losses for the industry is showing a declining trend.
As asset quality improves, banks are keeping aside less allowance for potential defaults. The ratio has stabilized around its current level over the last six weeks. The above graph shows the weekly ratio of ALLL to total loans for all US commercial banks.