Low rates, troubled loans send bank profits lower

For major U.S. banks, 2016 is getting off to a lousy start. Energy loans are turning bad, low interest rates are making it hard to make profitable loans, and markets have been volatile.

On the bright side, first-quarter results from banks haven’t been quite as bad as many analysts feared. Banks are still the worst-performing industry in the stock market so far this year, however. The financial component of the Standard & Poor’s 500 index is down 3.5 percent.

Part of the problem is that the billions of dollars in oil loans the big banks made during the commodities boom have become the latest set of troubled assets on their books. JPMorgan Chase, Bank of America and Wells Fargo all said they had to set aside more money to cover bad energy loans last quarter and expect to continue to do so as long as oil prices remain low.

Wells Fargo has some of the riskiest exposure among the banks. The San Francisco-based bank has $40.7 billion in total oil and gas exposure, with roughly three-quarters of those loans being in some of the hardest-hit areas: extraction companies, oil field service companies, and drillers who operate under contract.

JPMorgan’s oil exposure is bigger than Wells Fargo’s, but the loans are mostly made to stronger, investment-grade companies. The bank still had to set aside $719 million in the quarter to cover potential defaults. Combined with a drop in trading, the loans caused JPMorgan to report its first quarterly profit decline in roughly two years.

The news out of BofA was just as bad. The Charlotte, N.C.-based bank has roughly $21.8 billion in energy exposure, with roughly a third of that being to high-risk oil field services and exploration companies. The company had to set aside $595 million in the quarter to cover souring energy loans.

That said, the problems with oil loans on these banks’ balances are microscopic compared with the problems they had with residential mortgages during the financial crisis. Financial analysts expect the oil loans to hurt bank profits for the foreseeable future, but the damage will be relatively small.

Banks with sizable trading desks — JPMorgan and BofA specifically — typically like to see more volatile markets because it boosts trading volume and profits. But last quarter’s wild markets did the opposite. JPMorgan’s markets and trading revenue fell 13 percent from a year earlier, hurt by stock, bond and its derivative trading operations. BofA suffered the same fate, with its sales and trading revenue falling 16 percent to $3.3 billion in the quarter.

While oil companies may be going belly up and trading operations are flat, the businesses most exposed to the U.S. consumer are doing just fine.

JPMorgan’s consumer banking division, its largest business by revenue and profit, saw net income rise 12 percent from a year earlier while revenue was up 4 percent year over year. The bank increased deposits and loans in the quarter, while continuing to cut expenses. Wells Fargo and BofA expanded their consumer loan portfolios sizably in the quarter.

Meanwhile, the number of consumers struggling to pay their loans continues to decline. Bank of America’s net charge-off ratio, which is how much of their loans they believe are not recoverable, fell to 0.82 percent from 0.95 percent a year earlier. The number of consumer loans at BofA that are 30 days or more past due fell to $3.8 billion from $4.4 billion a year earlier.

This story was originally published April 14, 2016 at 3:58 PM with the headline "Low rates, troubled loans send bank profits lower."