WFC.N) and Bank of America Corp (BAC.N) on Thursday as rising bad loans added to a tough climate for trading bonds and currencies, along with persistently low interest rates.
Wells Fargo and Bank of America, two of the biggest lenders to the U.S. oil and gas sector, each set aside hundreds of millions of dollars in additional provisions to cover souring loans to energy companies. [nL3N17H3HQ][nL3N17H37V]
While the price of oil has risen off decade-lows hit in January, it is still trading around $40 a barrel, well below the $100 plus levels seen in 2014 and spelling trouble for many exploration and production firms.
Energy XXI Ltd (EXXI.O) filed for bankruptcy protection on Thursday, joining dozens of other energy companies that have done the same in recent months. Many more are expected to follow.[nL3N17H2HM]
“Our oil and gas portfolio will continue to be impacted by the volatility and stress in the industry and it will take time to move through this part of the cycle,” said Wells Fargo Chief Financial Officer John Shrewsberry.
JP Morgan Chase & Co (JPM.N) said on Wednesday it could boost its provisions to cover soured energy loans by another $500 million this year, on top of the $529 million taken in the first quarter.
Wells Fargo said it had changed its consumer-loan standards in areas reliant on the energy industry, such as Houston and parts of Alaska, after delinquencies started to increase.
But overall, energy was the one dark spot where credit quality was declining instead of improving in otherwise solid portfolios of loans to individuals and companies, executives said.
“Outside the energy sector, credit quality is strong,” Bank of America Chief Financial Officer Paul Donofrio said during a conference call with analysts.
Losses on energy loans, which account for a small percentage of big banks’ overall portfolios in the United States, would not be as big an issue if their businesses were humming along more profitably. Although consumer and corporate balance sheets are in good shape, the amount of money banks can earn by lending is limited by interest rates that have remained stubbornly low for years.
The U.S. Federal Reserve has kept rates low since the 2007-2009 financial crisis to re-energize the economy. In December, the Fed raised its rate target slightly but officials have been cautious about hiking it further, fearing the economy was not yet strong enough. [nL2N17E22H]
Outside of lending, capital markets businesses have been hampered by factors ranging from higher capital requirements to weak volumes and unexpected volatility, particularly in bond markets. JPMorgan’s bond trading revenue fell 13.4 percent in the first quarter compared with the same period a year earlier, while Bank of America’s fell 17.5 percent.
Banks have been searching high and low for opportunities to increase revenue, in the meantime cutting costs to keep profits as buoyant as possible.
JPMorgan is in the process of cutting $4.8 billion from its expenses, even as it hires technology staff to remain competitive, executives said on Wednesday, when the largest U.S. bank by assets reported results. [nL3N17G3A7]
As part of its efficiency program, Bank of America has been getting rid of managers and trying to cut down on red tape, said Donofrio, the CFO. Bank of America Chief Executive Brian Moynihan said earnings were “good” across all business segments except the one hit by energy loans, largely because of cost cuts. [nL3N17H37V]
Overall, Bank of America’s quarterly profits fell 18 percent, while JPMorgan’s earnings fell 7 percent, as did Wells Fargo’s. [nL3N17H3HG]
Citigroup Inc (C.N) reports results on Friday, followed by Morgan Stanley (MS.N) and Goldman Sachs Group Inc (GS.N) next week.
The results so far have been strong enough to send bank stocks higher, and to satisfy Wall Street analysts, who reduced estimates so much in the weeks leading up to bank earnings that the subdued results beat those figures.
Wells Fargo’s shares added 0.3 percent on Thursday, following a 2.8 percent rise on Wednesday, when JP Morgan’s better-than-expected results lifted the sector. Bank of America gained 3.0 percent in midday trading.
Barclays bank analysts titled their report reviewing JPMorgan earnings, “Good Enough Sparks a Rally.”
(Additional reporting by Nikhil Subba)