United States: Several regional lenders incurred loan-loss provisions in the third quarter due to possible borrower defaults in the wake of recent hurricanes, mainly in Florida, thus bringing out the dangers that come with natural disasters and Climate change.
Hurricanes Trigger Loan-Loss Provisions
Hurricane Irma and Hurricane Maria affected Florida as they both hit the Sunshine State in the last two weeks of September and the initial week of October, respectively, with resulting loss of lives, homes, and other properties, downed power lines, and other properties, that affected millions of residents along the coastlines, as reported by Reuters.
The financial sector is also not immune to the highs and lows, with regional players such as Valley National Bancorp (VLY.O) already moving to counterbalance them.
Financial Sector Adjusts to Climate Risks
It has an asset size of around $62bn and has 230 branches, including 40 of its branches in Florida, established $8mm kept apart as a hedge against Hurricane Helene.
It is noted that climate risks have been of interest to banks and regulators for quite some time, as they have been trying to incorporate them into the evaluation of their loan portfolios.
Whereas more conventional lending criteria tend to focus on economic concerns and interest rates, borrowers’ exposure to severe climate events introduces qualitative and measurable elements that can be powerful and volatile.
Collateral taken against mortgages could be damaged or have value decreased, and this changes more risk ratings among banks.
There are also effects on the businesses where they could reach a point of closure, which in turn affects the customers’ finances, thus causing them to delay in repaying credit card balances.
Provisions Due to Hurricane Milton
Seacoast Banking Corporation of Florida (SBCF.O), with total assets of $15.2 bln and a number of branches of 77, is to take $5 mln – $10 mln provisions for the fourth quarter due to Hurricane Milton but states that the potential extent of the blow for the most affected zones remains uncertain.
The largest credit unions, such as First Bancorp (FBNC.O) and United Community Banks (UCB.N), lost $13 million and $9.9 million, respectively, to Helene. On the same note, Florida-based bank holding company BankUnited Inc (BKU.N) noted that it is in the process of evaluating Milton.
The financial loss will not be restricted to banks as analysts have said that insurers will be paying an estimated figure above $100 billion.
Significant Financial Implications
Hurricane Milton hit Florida, leaving power outages and claiming at least 10 people’s lives. This occurred after Hurricane Helene attacked Florida’s Big Bend as category 4, then moved north across several states and caused massive destruction and many deaths.
However, the banks may experience an increase in business activities in the coming periods because people who suffered from the disasters lose their homes or need to restore the companies’ operations.
Increased Lending Opportunities Ahead
In most cases, there is an increase in the lending process after such occurrences due to increased needs for mortgage, small business, and consumer credit, as highlighted by the Federal Reserve Bank of New York in its report released in 2021, as reported by Reuters.
Sources also indicate that there may be certain relaxations by the banks in the form of subsidized interest rates, post payment moratoriums, and income-based payment structures.