Wells Fargo earnings dampened by losses on oil and gas loans

For months, falling oil prices have been battering energy companies. Now the damage is trickling down to the banks that lend money to them.

Wells Fargo on Friday said fourth-quarter results were flat compared with a year ago, as the bank absorbed higher loan losses tied to the oil and gas industry.

The San Francisco bank reported $5.7 billion in net income – more than any other big bank – but analysts peppered executives with questions about the bank’s lending to energy-related firms.

Wells set aside $831 million for bad loans in the period, almost double the amount a year ago and the largest since the first quarter of 2013. The losses included $118 million from the bank’s oil and gas portfolio, an increase of $90 million from the third quarter.

While falling oil prices have been welcomed by drivers at the pump, they’re causing oil and natural gas companies to cut production, lay off workers and fall behind on their loans. On Friday, the price of crude oil slipped below $30, the lowest level since 2003.

“Clearly, it’s a big negative until we have a better idea of where oil is going,” said Erik Oja, banking analyst with S&P Capital IQ.

Wells Fargo shares on Friday fell more than 3 percent to close at $48.82, on another down day for the markets. Bank of America shares also dropped more than 3 percent to $14.46, while Citigroup shares fell more than 6 percent to $42.47.

So far in 2016, the KBW Bank Index, which tracks 24 financial institutions, is down nearly 13 percent, amid concerns about oil prices, China and the global economy.

Of Wells’ $17 billion in oil and gas loans, 38 percent were classified as “criticized,” or substandard, in the fourth quarter, chief financial officer John Shrewsberry said in a conference call with analysts. That was up from 33 percent in the third quarter.

“We continue to work closely with our customers and are monitoring market conditions,” Shrewsberry said. “However, as we’ve mentioned in the past, it takes time for losses to emerge and at current price levels we would expect to have higher oil and gas losses in 2016.”

Energy loans remain less than 2 percent of the bank’s total loans outstanding, and Wells has an allowance of $12.5 billion built up to cover bad loans, he noted.

Overall, the bank’s loan losses equaled 0.36 percent of average total loans on an annualized basis. In comparison, that figure was 2.71 percent in the fourth quarter of 2009, when the economy was in much worse shape.

On a per-share basis, Wells reported earnings of $1.03. That beat analyst expectations of $1.02, according to Bloomberg.

For all of 2015, Wells made $23.03 billion, down slightly from a record $23.06 billion a year ago. During the quarter, the bank moved up to No. 3 in total assets among U.S. banks, eclipsing Citigroup.

The bank’s total revenue climbed about 1 percent to $21.6 billion in the fourth quarter, while non-interest expenses fell about 2 percent to $12.4 billion.

Oja, the analyst, said the bank’s overall performance was fine during the quarter, but analysts were surprised by how much the bank’s provision for bad loans increased.

“They’ve been living off low provisions for a couple of years,” he said. “They have been releasing reserves but now they have to build them. But it was well known that would end.”

Employment drops

Although based in San Francisco, Wells has its largest employee hub in Charlotte, with more than 23,000 workers.

The bank’s overall employment dipped by 500 from September to 264,700 at the end of December. The Observer reported Thursday that Wells is eliminating 121 technology jobs nationwide, including 39 in Charlotte, as part of an efficiency initiative.

On other fronts, Wells is bulking up through previously announced deals to buy finance units that are being shed by industrial conglomerate General Electric.

The bank’s purchase of GE Railcar Services closed on Jan. 1 and its purchase of other GE commercial finance businesses is expected to be completed in coming weeks. About 2,900 new employees will be joining Wells after those purchases close, the bank said.

Total loans at the bank were up about 6 percent to $916.6 billion from a year ago, helped by GE deals.

Citigroup on Friday said fourth-quarter net income increased to $3.3 billion from $344 million a year ago, as legal costs dropped. On Thursday, New York-based JPMorgan Chase said earnings rose 10 percent to $5.4 billion from a year ago.

Charlotte-based Bank of America issues its results on Tuesday.

This story was originally published January 15, 2016 at 8:10 AM with the headline "Wells Fargo earnings dampened by losses on oil and gas loans."