How Are Low Oil Prices Affecting Banks?

Oil prices are still reeling, and banks haven’t escaped the aftermath. Both producers and investors have been hit hard, and now three of America’s largest banks have reported respective US$500 million blows to their energy portfolios. And according to analysts, there’s still more to come…

US banks are now bracing themselves for even more fallout, with Wells Fargo, Bank of America and JPMorgan Chase set to be hit the hardest. All three were notoriously assertive with their lending during the oil boom, with portfolios built on the assumption that high prices were a constant.  

Banks pad out energy reserves

Yet with prices now flailing at around US$40 a barrel, the outlook isn’t looking bright. The cost per barrel has dropped 60% since 2014’s peak, and banks are now struggling to keep up with expenses. Earlier this month Wells announced plans to increase its energy loss reserves from $1.2 billion to $1.7 billion by the end of the fourth quarter. Bank of America had a similar reaction, pledging to boost its reserves by $529 million, with scope to increase this by a further $500 million by the end of the year.

Optimism from executives

Despite the bleak statistics all three banks have stressed that their energy loans are under control, and make up just 2% of their total portfolios. They also maintain that currently, second-round oil slide effects are safely contained within oil-dependent regions, such as Texas, Oklahoma and the Dakotas.

A realistic outlook

That said, the leading banks have also admitted that energy concerns are an ongoing issue, especially given the unpredictable price of oil and widespread portfolio instability. The past few months have seen disquieting figures emerge, with Wells reporting a 19% rise in the number of “criticised” loans at the end of the first quarter. Furthermore, the bank has been exposed to 11 of the 100 bankruptcies that have hit America’s oil sector over the past few years.

"My assumption is we’ll be talking about this all year,” comments Wells Fargo CFO, John Shrewsberry. “We feel great about the reserves [now] but I’d be hesitant to tell you that this was the big quarter, this was the quarter.”

As well as worrying about financial insolvencies, banks are also in the spotlight for funding oil and gas projects that are detrimental to the environment. For more insight into the latest concerns, ‘Unconsidered Mercury Emissions from the Oil and Gas Industry’ is an unbiased article exploring the presence of the highly toxic element, and the risk it poses to employees during plant shutdowns or maintenance work.