US regional banks raise rainy day buffers for extreme weather events

Several regional lenders allocated loan-loss provisions in the third quarter to cover potential defaults by borrowers grappling with recent hurricanes, primarily in Florida, highlighting the risks extreme weather and climate change pose to banks.

Two devastating hurricanes struck Florida in late September and early October, causing loss of life, damaging homes, public property and power lines, as well as affecting millions of people living on the coast.

The financial sector is also feeling the impact, with regional lenders such as Valley National Bancorp taking steps to mitigate potential losses.

The bank, which has about $62bn in assets and operates 230 branches nationwide — 40 of them in Florida — set aside $8m in reserves to mitigate Hurricane Helene’s impact.

“While not anticipated based on information currently available, Hurricane Milton and unexpected losses from Hurricane Helene could result in a significant increase to the current hurricane-related reserves within the allowance, loan charge-offs, and our provision for the fourth quarter,” the company said in a statement earlier this month.

Climate-related risks have long been a concern for banks and regulators, who have been striving to integrate these factors into their loan portfolio assessments.

While traditional loan underwriting typically considers economic risks and interest rates, the impact of extreme climate events on borrowers’ creditworthiness can be both big and unpredictable.

Properties pledged as collateral for mortgages may be destroyed, prompting banks to adjust their risk ratings.

Business closures could also strain customers' finances, prompting them to fall behind on credit card payments.

Seacoast Banking Corporation of Florida, with $15.2bn in assets and 77 branches, expects to take provisions of $5m-$10m in the fourth quarter due to Hurricane Milton, but warns the full impact on hardest-hit regions is still unclear.

First Bancorp and United Community Banks took provisions of $13m and $9.9m, respectively, due to Helene. Meanwhile, Florida-based BankUnited said it was finalising its assessment of Milton’s damage.

The financial loss will extend beyond banks, with analysts expecting insurers to be on the hook for losses exceeding $100bn.

Hurricane Milton devastated Florida, causing at least 10 deaths and widespread power outages. It followed Hurricane Helene, which hit Florida’s Big Bend as a category 4 storm that moved through several states and left a trail of destruction and numerous fatalities.

Still, banks may see an uptick in business in the coming quarters as people affected by the disasters seek financing to rebuild their homes and businesses.

Typically, there is a big rise in loans after such events, driven by higher demand for mortgages, small business and consumer loans, according to a report published by the Federal Reserve Bank of New York in 2021.

Analysts suggest that banks may also provide concessions, such as lower interest rates, deferred payments and income-contingent plans, to alleviate the financial burden on borrowers.

Reuters