U.S. banks stockpiled their defenses against rising loan losses on Friday as oil prices dived below $30 a barrel and global equity markets fell sharply.
Wells Fargo & Co (WFC.N) raised provisions against soured assets by more than 70 percent, nearly half of them for oil and gas loans, to ensure it is covered should prices stay at current levels for the rest of the year. The move helped drive a dip in fourth-quarter net profit.
The San Francisco-based bank, a major lender to the U.S. energy industry, said it and other banks were talking to borrowers, including production companies and oil services firms, about how to navigate the crunch.
“We are all being appropriately tough to make sure that we protect the interests of the bank," John Shrewsbury, the bank's chief financial officer, told analysts. "We are working with each customer to help them to work through this. It does not do us any good to accelerate an issue or to end up as the holder of a number of oil leases."
Citigroup Inc (C.N) set aside $250 million to cover losses related to its energy portfolio but said if the price of oil were to drop to $25 for a sustained period, it would have to double the amount of overall provisions it has pencilled in at $600 million for the first half of this year.
The oil price rout has dominated the start of U.S. bank earnings season despite energy loans accounting for 3.4 percent or less of the major banks' portfolios, according to analysts at Barclays bank.
SUBDUED REVENUE GROWTH
Bank bosses sought to reassure investors that the pain was so far restricted to the energy sector and there was still demand for car loans, mortgages and commercial real estate and that customers are making loan payments as regularly as ever.
JP Morgan Chase & Co (JPM.N) Chief Executive Jamie Dimon said he did not expect losses on the bank's oil and gas loans to accelerate with the pace and severity that the decline in oil market prices might suggest. [L2N14Y1NW]
But the turmoil has pared back market expectations on how often the U.S. Federal Reserve will hike rates this year, which would lift bank profits. The December Fed funds futures contract FFZ6 was pricing in just one increase on Friday.
Revenue growth remains subdued for U.S. banks. The major banks that have so far turned a net profit - Citigroup and JP Morgan - have done so through cost cutting and lower legal bills as the number of crisis-era misconduct cases abates.
Goldman Sachs Group Inc (GS.N), however, delivered a blast from the past this week when it said it had reached a $5 billion agreement with the U.S. Department of Justice and other authorities to settle claims it misled mortgage bond investors during the crisis.
Goldman said the deal would cut fourth-quarter earnings by about $1.5 billion. Analysts have now tapered their expectations for Goldman's net income per share to $3.30 from $3.71 previously according to Thomson Reuters I/B/E/S estimates.
Goldman is expected to report fourth-quarter results next Wednesday.
GAINS AND EXPENSES
Citigroup reported its biggest full-year earnings in nearly a decade on Friday as its strategy of pulling back from countries and businesses yielded returns.
But the bank's shares slid as much as 7.8 percent on Friday as investors fretted about its exposure to emerging markets, including Latin America and Asia, and puzzled about how to separate its core performance given an array of unusual gains and expenses.
“It is almost impossible to specify what the ‘true’ operating results were,” Oppenheimer analyst Chris Kotowski, who rates the stock “outperform,” said in an initial note to clients.
Citi's pullback contrasts with Wells Fargo's strategy of buying assets and building deposits to drive growth. Wells overtook Citi as the third-largest U.S. bank by assets with its results.
Wells' shares were down nearly 4 percent on Friday afternoon.
The outlook for trading desks will take center stage next week when Morgan Stanley (MS.N) and Bank of America (BAC.N) report results, in addition to Goldman Sachs.
Quarterly trading revenue from stock trading, which Citi is emphasizing, rose 29 percent in the fourth quarter from a year ago but was down 39 percent from the third quarter. Revenue from fixed income trading rose 7 percent in the fourth quarter from a year ago and fell 14 percent from the third quarter.
(Reporting by Sweta Singh and Sruthi Shankar in Bengaluru and David Henry and Dan Freed in New York; Writing by Carmel Crimmins; Editing by Matthew Lewis)