Monday, 18 January 2016

Banks Brace for Bigger Losses After Oil Drops Below $30

In World Economy News 18/01/2016

The Wall Street banks that financed the U.S. shale boom are facing growing losses as oil falls below $30 a barrel.
Losses are spreading from bondholders to banks amid the worst oil crash in a generation. Wells Fargo & Co., Citigroup Inc.and JPMorgan Chase & Co. have set aside more than $2 billion combined to cover souring energy loans and will add to that safety net if prices remain low, the companies reported this week. Losses are mounting as more oil and natural gas producers default on debt payments and declare bankruptcy. Wells Fargo lost $118 million on its energy portfolio in the fourth quarter and Citigroup lost $75 million.
“It takes time for losses to emerge, and at current levels we would expect to have higher oil and gas losses in 2016,” John Stumpf, Wells Fargo’s chairman and chief executive officer, said during a Friday earnings call.
Oil plunged 36 percent in the past year, putting an end to the debt-fueled drilling spree that pushed U.S. oil production to the highest in more than 40 years. After years of spending more than they made, shale companies have parked drilling rigs and fired thousands of workers in an effort to conserve cash. In 2015, 42 oil and and gas producers went bust owing more than $17 billion, according to law firm Haynes & Boone LLP.
Growing Losses
The weakness in oil and gas lending was a hot topic during bank earnings calls this week, and it’s clear that the potential for losses is snowballing the longer prices remain low. Wells Fargo’s energy reserves of $1.2 billion are enough to cover 7 percent of the $17 billion of the bank’s outstanding oil and gas loans.

JPMorgan Chase boosted energy loan-loss reserves by $550 million last year and said it will add another $750 million if oil stays at $30 for 18 months. Citigroup increased reserves by $250 million and that will go up by an additional $600 million in the first half of 2016 if oil prices remain at $30. If oil falls to $25, that number may double.
Lenders are walking a tightrope between helping their clients stay afloat and looking out for their own bottom line. Borrowers with risky credit typically put up their oil and gas properties as collateral for their loan. Historically, lenders managed to get all of their money back, even in bankruptcy, by liquidating the assets. However, foreclosing on a troubled borrower comes with the risk that the properties will sell for less than is owed to the bank.
“We’re being appropriately tough to make sure that we protect the interests of the bank,” said John Shewsberry, chief financial officer of Wells Fargo, during a conference call on Friday. “We’re working with each customer to help them work through this. It doesn’t do us any good to accelerate an issue or to end up as the holder of a number of oil leases.”
“If banks just completely pull out of markets every time something gets volatile and scary, you’ll be sinking companies left and right,” Jamie Dimon, JPMorgan’s CEO, said during a conference call Thursday.

Source: Bloomberg