Wall Street's Oil Bankers Setting Aside More Cash for Lossesby
Bank of America boosted energy loss reserves by $525 million
Wells Fargo's energy loan loss reserves rise to $1.7 billion
The Wall Street bankers that backed the biggest oil boom in U.S. history are paying a price for the bust.
Lenders including JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. are setting aside more money to cover potential loan losses after crude prices fell 61 percent in less than two years. Bank of America added $525 million to its oil and natural gas loan loss reserves, bringing the total to more than $1 billion, according to an earnings statement on Thursday. JPMorgan said Wednesday that it had added $529 million, bringing the total to $1.3 billion. Wells Fargo said Thursday that it had added about $500 million, bringing the total to $1.7 billion.
Banks have come under pressure from regulators and investors to reduce their exposure to the industry. Since the start of the year, lenders have pulled $5.6 billion of credit from 36 oil and gas producers, a reduction of 12 percent. It’s the most severe retreat since the bust began and an abrupt turnaround from last year when banks were lenient on struggling drillers in the hope that oil prices would rebound.
Of Bank of America’s outstanding $21.8 billion of energy loans, $7.7 billion are to oilfield services and exploration and production companies, which it called "higher risk sub-sectors." Of that, $4.3 billion, or 56 percent, has been deemed “criticized,” a regulatory designation that means the loans, at best, exhibit potential weaknesses.
Wells Fargo reported $204 million in net charge-offs related to oil and gas, all of which were related to oilfield services and upstream producers. Nonaccrual oil and gas loans rose by $1.1 billion to $1.9 billion.
In yet another example of the growing risk, Energy XXI Ltd. filed for bankruptcy protection Thursday. Wells Fargo was a lead lender on Energy XXI’s credit line.
Bank examiners have pushed lenders to take a tougher stance when rating the loans, even those like Energy XXI’s that are backed by oil and gas reserves. Reserves-based loans have long been considered bulletproof because lenders got back every penny, even in default. However, companies now may be unable to liquidate assets for enough money to repay their banks. Wells Fargo is one of the leading lenders of such debt.