Fears of deeper toll on US banks from oil crash
The oil price crash could take a much larger toll on US banks than the banks have reported in their fourth quarter earnings reports, US analysts worry.
Over the last week leading banks revealed significant but manageable hits from the oil rout, reflecting a surge in souring loans made in support of the US shale boom.
Banks have downgraded loans to energy companies, increased reserves in case of defaults and outlined stiffer oversight of troubled loans.
JPMorgan Chase, the biggest US bank by assets, said the drop in oil prices from more than $100 a barrel to under $30 a barrel resulted in additional reserves of $86 million after it downgraded oil and mining loans.
JPMorgan also warned that it would book an additional $750 million if oil prices stay at $30 a barrel for 18 months. Bank of America, Citigroup and Well Fargo all made similar announcements.
Still, the reserves discussed are relatively modest thus far, raising fears of deeper problems and much bigger losses.
"It's not enough," said Gregori Volokhine, president of Meeschaert Capital Markets. "We have the impression banks are not telling us everything."
"The problem banks have is that no one can quantify what the risk is," said Richard Bove, a bank analyst at Rafferty Capital.
If oil recovers to $35 a barrel, many bank clients will be able to meet their loans, Bove said.
"If oil stays at $30 a barrel for 12 months, it's clear these companies will have to come up with a little money," he said. "At $25 a barrel, they will have to come up with a lot of money."
The question is, just how hard that scenario could hit banks' balance sheets.
- Bad, but no crisis -
Bank shares have suffered as oil prices have retreated, with the KBW Bank index down 15 percent in January alone, in one of its sharpest declines since the dark days of the financial crisis in 2009.
Among the large banks, Bank of America had $21.3 billion in overall energy loans outstanding at the end of December; Citigroup had $20.5 billion; Wells Fargo $17 billion and JPMorgan $13 billion. Goldman Sachs had $10 billion and Morgan Stanley $4 billion.
Smaller regional banks are also under scrutiny. Dallas-based Texas Capital Bancshares has seen nonperforming loans steadily rise to $180 million from $43 million in the year-ago period.
The bank anticipates $10 to $15 million in losses over the next year, with those figures growing if oil prices fall further, said Texas Capital chief financial officer Peter Batholow.
According to an annual review by the Federal Reserve in November -- when the crude price was around $15 a barrel higher than it is now -- oil and gas loans rated "substandard" or "doubtful" rose sharply from $6.9 billion in 2014 to $34.2 billion in 2015.
But Bove said the overall impact on the financial sector should not be exaggerated.
Energy loans only constitute about three percent of the portfolio of most banks, and in many cases, are granted to investment-grade companies, including highly profitable behemoths like ExxonMobil and Chevron.
There is "no comparison" to the crisis caused by bad subprime loans, Bove said.
"Not only is the size of the portfolio dramatically smaller ... but the guy on the other side is an investment-grade company in many cases."
On the other hand, there will also be consequences when energy companies fail and lay off staff.
"Then there are mortgages, auto loans and credit loans which are going to go bad," Bove said.