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 Loan credit quality for U.S. banks has been improving since the
financial crisis. In the first quarter, 2.49 percent of loans on
banks' books were delinquent, the lowest level since the fourth
quarter of 2007, according to the Federal Reserve, which hasn't
released second quarter data. The rate peaked at 7.4 percent in the
first quarter of 2010.
Weakness among energy company loans could be a sign that overall
credit quality among U.S. banks has little room to improve, analysts
said. Executives from both JPMorgan Chase & Co. <JPM.N> and Wells
Fargo & Co. <WFC.N> told investors last week, when posting earnings,
that they were increasingly concerned about loans to oil and gas
companies.
Texas bank Comerica Inc <CMA.N> on Friday set aside about three
times as much money to cover bad loans as analysts had expected,
sending the regional bank's shares lower by more than 6 percent
after the bank reported earnings Friday. Setting aside more money,
known as "provisioning," hurts earnings.
"The banks really have very low credit costs and those can go
higher," said Fred Cannon, who heads research at Keefe Bruyette &
Woods. While "energy overall is not a life threatening issue for the
banks, it is earnings threatening," he said.
JPMorgan said on Tuesday it provisioned another $252 million to
cover potentially bad wholesale business loans in the quarter, with
$140 million of that related to oil and gas lending.
Oil prices rallied in March and April, but in recent weeks have
fallen again on expectations that loosened sanctions against Iran
create the potential for greater supplies. U.S. crude oil prices
<CLc1> fell below $50 a barrel on Monday for the first time since
April.
U.S. accounting rules require that banks set aside money to cover
losses on loans only after the loan has shown visible signs of
deteriorating, such as a borrower having missed an interest payment.
The rules are subject to wide interpretation, however, so that such
things as weaker oil and gas prices could potentially prompt some
borrowers to increase their provisions.
The hit to earnings from banks' higher provisioning could pour cold
water on shares of a sector that has been on fire recently. Since
the end of January, U.S. bank stocks have risen 18.7 percent,
compared with a 6.6 percent gain for the broader Standard & Poor's
500 index. Much of that optimism has come from investors preparing
for the Federal Reserve to raise interest rates, boosting the rates
at which banks can lend and therefore their profits.
Bank profits have been essentially stagnant in recent years, thanks
to low rates and tepid economic growth.
JPMorgan CFO Marianne Lake said the bank "might expect" to add more
reserves before this year is out. "It is possible we will be
selectively downgrading some clients," she said. She described the
increases in reserves as "completely normal" in the business cycle.
"We are still very happy," Lake said.
CEO Jamie Dimon, interjecting as Lake spoke, said, "Those reserves
do not mean we're going to have losses."
To be sure, credit quality is still good. Wells Fargo said that for
its overall loan book, the balance of loans on which borrowers had
stopped making interest payments declined $67 million in the second
quarter, even though delinquencies rose among energy sector
companies. Residential mortgage loans are performing better.
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CFO John Shrewsberry predicted energy-related credit performance
will remain weak.
"We're still resolving these issues," he said on a conference call
with investors on Tuesday. "Some of them are just coming to light
for certain borrowers, but it's a very contained portion of our loan
portfolio and the aggregate impact should not be material to Wells
Fargo."
Energy exposure accounts for just 2 percent of Wells Fargo's loan
portfolio. However, as KBW's Cannon said, the total money the bank
has provisioned for bad loans over time is even smaller— just about
1.2 percent. A Wells Fargo spokesman declined to comment.
PLUNGING OIL PRICES
Following an annual exam of loan credit quality, regulators are
pressing banks to set aside more money to cover their energy loans,
according to a report earlier this month from the Wall Street
Journal.
Comerica CFO Karen Parkhill said in an interview that provisions
could increase further if oil prices remain low, though this could
be offset somewhat if borrowers begin paying down debt, as has
occurred in past periods of weak oil prices.
As for why provisioning was so much larger than expected, Parkhill
said, "we did always say that we would expect continued negative
credit migration if oil prices remained low and that’s what has
happened."
Moody's Investors Service flagged the issue in a report published
Monday. Banks it singled out as having particularly high exposure to
the energy sector by at least one measure were led by BOK Financial
Corp , Hancock Holding Co, Texas Capital Bancshares Inc. and
Cullen/Frost Bankers Inc. While noting "asset quality deterioration"
in the energy loan portfolios of Wells Fargo and JPMorgan, Moody's
analyst Joseph Pucella wrote that the exposure of those banks is
"comparatively small."
BOK Financial investor relations director Joseph Crivelli responded
to questions with a statement noting the bank forecasted loan loss
provisions of $15 million to $20 million for 2015.
"We continue to believe that our energy portfolio is sound from a
credit standpoint," the statement read in part. "Stress tests on the
portfolio conducted earlier this year reveal only a handful of
customers who would demonstrate weakness in a highly stressed
environment."
Spokespeople for Hancock, Texas Capital Bancshares and Cullen/Frost
declined to comment.
(Reporting by Dan Freed, editing by Dan Wilchins and John Pickering)
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