Loan Losses Matter: Investors Ought to Pay Attention

The level of concern among investors wondering how bad the recession may be is not surprising. Bearish views on a number of sectors have broadly affected stock prices and sentiment around growth and dividend distributions, for example, but some sectors, such as financials, have certain assumptions baked into these stock prices which may not make sense based on recently released data around potential loan losses in the sector.

One such assumption for most financial stocks happens to be around low loan losses continuing indefinitely, something that certainly does not look like will be the case in the months to come. U.S. giants Wells Fargo Bank (NYSE: WFC) and JP Morgan (NYSE: JPM) recently announced an increase to expected loan losses of US $8.3 billion and US $4 billion, respectively. These loan losses are material encumbrances for these large banks and represent a serious deterioration of loan quality to a degree we have not seen in quite awhile.

As unemployment numbers continue to climb, the question of how high future provisions for loan losses will be among large U.S. and Canadian banks remains to be seen. I think these recently reported numbers ought to be taken seriously by all investors considering adding to existing positions or initiating new positions in large American banks. Right now, most of these provisions remain just that – provisions. As we see actual loan losses come through, investors ought to pay close attention to these numbers as well.

Invest wisely, my friends.