Soured Corporate Loans Surge at Biggest U.S. Banks on Oil

  • Troubled loans at BofA, JPMorgan, Wells are highest in years
  • 'We're at the very early stages of an inflection point'

Soured loans to companies jumped 67 percent at the three biggest U.S. banks in the first quarter, the latest sign that corporate credit quality is eroding after energy prices plunged.

At Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., bad loans to companies reached their highest levels since at least 2013. For now, weakness is mainly confined to oil and gas and related industries, executives said. U.S. crude has tumbled more than 60 percent since June 2014, although they have rallied since February.

Troubled loans have broadly been declining at big banks for years, and at JPMorgan and Bank of America, are less than 1 percent of total assets. But there are signs that default risk is rising in sectors outside of energy, including health care, James Elder, a director in corporate and financial institutions at Standard & Poor’s, said in a presentation this week.

Charles Peabody, a banking analyst at Portales Partners, downgraded JPMorgan to "underperform" from "market perform" in February in part because of concerns about the potential for mounting credit losses. 

"We’re at the very early stages of an inflection point in corporate credit quality, and it’s getting worse from here," Peabody said. 

Pri de Silva, an analyst at CreditSights, is among those who see current credit problems as limited to oil and gas and related industries.

"At this point, I don’t see much contagion," he said.

Deterioration Preparation

Banks have been getting ready for loans to deteriorate -- the industry added $1.43 billion in the fourth quarter to the total money it has set aside to cover bad loans, according to Federal Deposit Insurance Corp. data compiled by Bloomberg, the first time banks in aggregate added to reserves since 2009. Banks usually classify loans to companies as "nonperforming" after the borrower is delinquent for 90 days. Loans that are unlikely to be repaid are also typically designated as "nonperforming."

Now loans are actually souring. At JPMorgan, bad loans to companies more than doubled to $2.21 billion from $1.02 billion in the fourth quarter, according to company filings. Bank of America said they rose 32 percent to $1.6 billion. And at Wells Fargo, they rose 64 percent to $3.97 billion, which includes $343 million from loans it acquired from GE Capital.

The increase in bad loans to companies mirrors the increase in defaults in corporate bonds. Default rates for U.S. high-yield bonds have been rising since early 2015, and are on pace to reach around 3.9 percent in April, up from 2.1 percent in the same month last year, according to Fitch Ratings.

Loans to companies may be deteriorating, but consumer loans at the big banks are still getting better. At JPMorgan, for example, bad consumer loans fell to $5.23 billion in the first quarter, from $5.4 billion in the fourth quarter of 2015.

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