Wall Street Sets Aside More Cash to Cover Weaker Oil Loans

Updated on
  • Loan loss reserves up at JPMorgan, Wells Fargo, BofA
  • Banks so far avoid 'death and destruction' of the oilpatch

Wall Street lenders that bankrolled the debt-fueled U.S. oil boom are putting aside more cash to cover potential energy losses as “lower for longer” takes its toll.

After rebounding to $61 a barrel in June, crude prices tumbled 24 percent in the third quarter. Citigroup Inc. reported Thursday that it increased loan loss reserves for energy by $140 million in the third quarter. JPMorgan Chase & Co. said that it set aside an additional $160 million. Bank of America Corp.’s at-risk loans increased 15 percent from a year ago due to the deteriorating finances of some of its oil and gas borrowers. And Wells Fargo & Co. reported that it reserved additional cash to cover potential losses in the energy sector.

The financial industry has so far avoided the kind of damage that triggered the collapse of hundreds of energy lenders in the 1980s. Banks are in the middle of the second round of twice-yearly reassessments of oil and gas credit lines, and borrowing limits have been cut for companies including SM Energy Co., Oasis Petroleum Inc. and Emerald Oil Inc. Producers have sold $61.5 billion in equity and debt since January, half of which went to repay loans or restructure debt, at least in part, according to data compiled by Bloomberg. 

Asked why lenders weren’t seeing more losses from energy defaults, Bank of America CEO Brian Moynihan said during a conference call Wednesday, “A lot of that risk is distributed out to investors.”

The financial crisis of the 1980s casts a long shadow, and banks have learned how to insulate themselves against the booms and busts of the oil industry. Throughout the boom, lenders extended low-interest credit to wildcatters desperate for cash, and then got repaid as shale drillers sold new stocks and bonds to yield-hungry buyers looking for higher returns after years of near-zero interest rates.

The cycle accelerated this year as prices crashed and regulators pushed banks to reduce their exposure to the struggling industry. Banks built in another layer of protection by requiring collateral, especially for the riskiest borrowers. Those assets are reassessed twice a year around April and October, and banks are in the middle of those reviews now. And as a last line of defense, banks often have the first claim on oil and gas properties in bankruptcy.

“I listen to our energy team and they talk about death and destruction in the oil patch, and I see the large numbers that banks like yours have, and I’m trying to square the circle,” Glenn Schorr, an analyst at Evercore ISI in New York, said during Citigroup’s conference call Thursday. “Why should we feel good about future reserves or current reserves on the energy book?”

“This is something that we’re looking at every day,” said John Gerspach, Citigroup’s chief financial officer, pointing out that two-thirds of its funded energy exposure is in investment-grade companies. “But it still remains a very high-quality book.”

Oil’s plunge has been harder on the companies and their investors. Shale drillers have slashed spending, laid off thousands of workers and seen their credit ratings downgraded. More than 74 percent of the stocks and bonds issued this year by North American oil and gas producers are worth less today than when they were sold, data compiled by Bloomberg show.  

“That’s what we’re here for is to lend to clients, particularly in tough times,” JPMorgan Chief Executive Officer Jamie Dimon said during a conference call Tuesday discussing third-quarter financial results. “You can’t be a bank that every time something goes wrong you run away from your client.”

(Updates with Citigroup results in second paragraph.)
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