Major Accounting Changes Are Coming To The Financial Industry

• Keefe, Bruyette & Woods believes the new current expected credit loss standard (CECL) will be unveiled within the next several months.

• The firm sees the new standard as a net positive in the long term for the financial industry.

• The terms of the new standard will likely have a range of impacts on different financial stocks.

In a new report, Keefe, Bruyette & Woods analyst Brian Kleinhanzl takes a look at the potential impact of the coming current expected credit loss standard (CECL). Kleinhanzl believes that the Financial Accounting Standards Board (FASB) will soon issue the new standard, and it could have a meaningful impact on the financial industry.

What To Expect

Kleinhanzl expects that the new standard will require reserved for expected credit losses, such as loans and held-to-maturity securities. While this might be a difficult initial adjustment for several financials, Kleinhanzl believes it will ultimately be a net positive for the industry.

Impact

Kleinhanzl predicts that the new standard will be announced sometime in the coming months, but will likely not go into effect until 2018 at the earliest.

“Overall, we believe that CECL will be good for the financial industry since volatility of earnings should be reduced over a credit cycle and we believe CECL will improve financial reporting by eliminating credit expense in interest income and requiring more robust disclosures versus what is found in financial reports today,” Kleinhanzl explains.

Which Companies Are Affected?

Keefe, Bruyette & Woods names Navient Corp NAVI, Springleaf Holdings Inc LEAF, First Bancorp FBNC, Heartland Financial USA Inc HTLF, Polular Inc BPOP and Hancock Holding Company HBHC as the financial stocks that could see the largest negative impact on pro forma book value.

The firm names Flagstar Bancorp Inc FBC, Central Pacific Financial Corp. CPF, 1st Source Corporation SRCE, TrustCo Bank Corp NY TRST, Glacier Bancorp, Inc. GBCI and First of Long Island Corp FLIC as the stocks that could see the largest positive impact on book value.

Disclosure: the author holds no position in the stocks mentioned.