Last week, Wells Fargo (WFC), one of the largest banks in the United States, announced significant increases in reserves and charge-offs for energy loans as part of the company’s Q1 2016 earnings release. WFC increased its reserves-to-loan ratio to 9.3% of total outstandings[1]. The bank attributed this change to deterioration in financial performance and collateral, driven by lower energy prices (it also disclosed that just 7% of its energy loans are to investment grade companies).

The bank announced that nonaccrual loans in the oil and gas portfolio are now $1.9 bln, or ~11% of energy loans, an increase of $1.1 bln from just last quarter. According to WFC, this material increase was driven by “higher outstandings, weaker expectations for borrower cash flows reflecting lower collateral values, the run-off of hedges, less sponsor support and the closing of external liquidity sources, as well as protective draws.”

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The bank now has an energy reserve-to-loan ratio of just below 10%, and the average including its large-cap counterparts is 6.3%[2]. This is significant since the Canadian banks have energy reserves-to-loans of just 1% (i.e., $500 mln against total loans of ~$50 bln). The fact Canadian bank reserve levels are so far behind their U.S. peers is one of the reasons why we believe the potential that the Canadian banks will seek to build reserves rapidly through sectoral allowances is increasing (see our Insight Part #1 of 3: Canadian Banks – Are Sectoral Allowances the Solution to Low Reserve Ratios?).

Other Q1 energy-related earnings news include:

  • PNC Financial Services Group (PNC) reported that its energy provision increased by ~250% from Q4 2015, while net charge-offs in the oil, gas, and coal portfolio doubled.
  • PacWest Bancorp (PACW), which has less than 1% of oil and gas loan exposure, increased its reserves to 15% of energy loans.
  • Bank of America (BAC) increased its oil and gas reserve by $525 mln, bringing the total to $1 bln, or ~4.5% of energy loans. Non-performing loans in the bank’s commercial portfolio grew by $391 mln (+33%), an increase driven by deteriorating energy loans.
  • JPMorgan Chase (JPM) reported $529 mln in provisions for oil and gas loans, after guiding towards $500 mln at its recent investor day, implying a reserve-to-loan ratio of 6.3%, according to the bank.
  • Regions Financial (RF) increased its direct energy loan portfolio reserve to 8% from 6% in Q4 2015. The bank also stated that increases in non-performing loans were driven by risk-rating migration in its energy portfolio. Criticized loans in its energy portfolio increased to 39% from 28%.
  • Citigroup (C) announced that over 80% of its year-over-year increases in credit costs are related to energy. C also noted that it has 8.8% of reserves against $1.4 bln in funded commercial energy exposure, and 4.2% of reserves against $22.3 bln in funded corporate energy exposure.

Clearly, this is an extremely difficult environment for energy companies and the banks that lend to them. We expect similar news from other energy lenders as Q1 earnings season continues for the U.S. banks.


Notes

[1] WFC, which has $17.8 bln in oil and gas loans, increased its reserve to $1.7 bln (versus $1.2 bln last quarter). The bank also charged off $204 mln of energy loans in Q1, a 74% increase from what the bank lost in the 4th quarter of 2015.
[2] Average includes WFC, BAC, C, JPM, RF, and PNC.

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