KBRA releases a research report examining bank earnings during the past several years, with a focus on the positive effects of the fiscal and monetary policies that were enacted in 2020 in response to the COVID pandemic. There is an emerging consensus that 2021-22 may have represented the cyclical peak in U.S. community and regional commercial bank earnings, which were bolstered partly by extraordinary revenue items connected to various governmental policies—both fiscal and monetary. Many of these policies were passed or implemented in 1H 2020 in response to the COVID pandemic and are unlikely to be repeated, barring another exogenous shock. If accurate, the question becomes where earnings might settle from a base of solid reported earnings in recent periods.

In this report, the first in a three-part series, KBRA evaluates the level and trend in structural earnings—those before loan loss provision and income tax expenses—leading up to the onset of COVID and thereafter. Between mid-2020 and into 2021-2022, earnings were buoyed in two extraordinary ways: (i) participation in the Small Business Administration Paycheck Protection Program (PPP) and (ii) margin contribution and gain-on-sale income from the effects of the Federal Reserve’s aggressive monetary actions. For example, in 2021, banks benefited from sharply declining deposit costs while assets yields were less affected due to realization of significant PPP income.

The report concludes that while structural earnings remain robust, continuing a multiyear performance trend, structural earnings would have been lower without the benefits of the combined fiscal and monetary policies.

In upcoming research, KBRA will explore the challenge to bank profitability from increasing funding costs due to the rise in interest rates beginning in 2022. A subsequent publication will evaluate the impact from a potential economic recession on loan quality performance metrics, including the magnitude of loan loss provision expense, and the degree of earnings buffer that community and regional banks would have available to absorb higher loan credit costs.

Click here to view the report.

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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