Wall Street Drilling for Oil Backfires as Banks Face Loan Losses
(Bloomberg) - 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 $595 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, which will release earnings later on Thursday, had $1.2 billion set aside at the end of 2015.
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 four-tier regulatory designation that means, at best, the loans exhibit potential weaknesses.
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.
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