There are evidences that provide banks are enduring the oil-price bust so far. Likewise, banks are admitting what investors have concluded that the energy bust is likely to result in major losses.
In the first-quarter earnings season, the biggest problem which causes anxieties is the banks’ unfunded energy exposures. What are unfunded energy exposures we are talking about here? These are lines of credit oil-and-gas companies that are not still selected. The giants of U.S. banks such as J.P. Morgan Chase Bank of America, Citigroup, and Wells Fargo are having unfunded energy exposure at the end of last year were even total funded at $117 billion.
In this matter, risks are still on the way when the companies in the oil patch hit trouble, they would rush to draw on their lines of credit. This can lead to expose banks for greater downfall.Good news on this perspective come also with bad news. The bad news is that some draw downs did happen during the first quarter while the good news is that they are only limited.
Wells Fargo & Co. set aside $1.2 billion in reserves for potential losses tied to oil and gas loans, according to a Wednesday securities filing. About 10% of Wells Fargo’s total loan-loss reserves are related to oil and gas, even though those loans account for about 2% of its overall loan portfolio, the filing said.
— The Capitalist (@Capitalist_Site) April 28, 2016
The bank’s non-accrual oil and gas loans or collectively the nonperforming loans on which the bank isn’t sure it will collect—totaled $844 million at the end of 2015, up more than 10-fold from $76 million at the end of 2014.
The disclosure was the first time the San Francisco firm, one of the country’s largest bank energy lenders, released details about potential oil and gas credit losses.