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Oil bust hits big US banks but pain looks manageable
[NEW YORK] Earnings from large US banks in the first quarter revealed more oil-bust pain, with banks raising reserves for additional bad energy loans and for defaults from related industries, like shipping.
Yet even as giants like JPMorgan Chase and Citigroup revealed a rising tally of costs, investors shrugged off the news, bidding up shares of banks as the financial behemoths reported lower earnings over the last week that still were better than feared.
The oil rout constitutes "the biggest test of credit quality since 2008," said Erik Oja, a banking analyst at S&P Capital IQ.
But Mr Oja said bank investors remain largely confident about the oil hit, in part because bank stress tests implemented in the aftermath of the 2008 financial crisis have strengthened the companies and because energy still only accounts for three or four percent of total loans for large banks.
The boost in oil prices by about 30 per cent since January has also helped.
"People are not panicking over it," Mr Oja said. "The exposures are nothing compared to the residential mortgages" exposure ahead of the 2008 crisis.
Citigroup chief financial officer John Gerspach said the bank has not see signs of contagion from oil to the broader economy.
"We haven't seen any credit deterioration in any of our books outside of that which is energy-related," said Mr Gerspach after Citigroup lifted its reserves by US$233 million due to energy-related loans.
"We're not seeing any migration of the energy-related issues into the consumer book at all."
Banks said that in addition to reserving for problem loans with embattled oil producers and oilfield suppliers, they were accounting for credit problems in other corners of the economy due to cheap oil.
JPMorgan boosted its reserves after downgrading US$529 million in oil debt and signaled it may need to take an additional US$500 million in reserves if oil prices stay low.
The figures take into account expected losses from sectors like shipping and marine transportation that have suffered due to the energy downturn.
"We're trying to be very complete," said chief financial officer Marianne Lake.
Wells Fargo, which set aside an additional US$500 million for credit losses in oil and gas, has over the past year stepped up monitoring of 15 "in zone" regions in eight states of the US where more than three per cent of the workforce is employed in energy.
The bank is tracking delinquencies in consumer loans, including auto loans, credit cards and residential real estate.
Until recently, the oil states had below-average delinquency rates but now delinquency rates are higher, in line with the rest of the country, the bank said.
"We currently anticipate further deterioration," said Wells Fargo chief financial officer John Shrewsberry.
"And while we remain committed to serving our customers, we have tightened our underwriting standards across our consumer portfolios in oil-dependent regions."
Yet Wells Fargo executives stopped well short of raising the alarm bell. Chief executive John Stumpf said the current downturn in Houston "feels different" from earlier oil slumps because of greater economic diversification in Texas.
Even if the oil hit is ultimately more benign than feared, analysts warned of a tough earnings environment ahead for banks, as low interest rates depress bank profits and uncertainty over the global economy and volatile financial markets limit gains from trading.
The banks are "very solid, but they are becoming less and less profitable," said Gregori Volokhine, president of Meeschaert Capital Markets.
The banks "are getting the loan growth, but the interest rate environment is pretty poor," Mr Oja said.
Mr Oja said the banks' best-case scenario is probably flat earnings in 2016 with a gain in 2017 if the US Federal Reserve lifts interest rates.
"If interest rates start to normalise a bit, then the first year of earnings growth would be in 2017. And that really holds for all the banks."