The same low oil prices that are saving you money at the gas pump are battering Charlotte’s two biggest banks.
Bank of America and Wells Fargo disclosed fresh pains Thursday from the struggling energy sector, as slumps in oil prices dragged down profits for both banks in the first three months of the year.
The two banks reported lower earnings compared with a year ago, in part because they stockpiled more money to cover potential losses on their energy loans. The earnings also reflect an array of other challenges facing banks, from persistently low interest rates to slowing global growth.
Charlotte-based Bank of America recorded profit of $2.7 billion in the first three months of this year, down about 13 percent from a year ago. San Francisco-based Wells Fargo said it earned $5.46 billion, a decline of about 6 percent.
A global glut of oil has dragged down the price of the commodity, a boon for drivers enjoying cheap gasoline. But dips in oil prices have pummeled the energy sector, raising questions about companies’ abilities to make future payments on their loans.
It remains unclear how much longer the oil price slump will hurt banks.
“I think it’s going to continue,” said Ken Thomas, a Miami-based bank analyst and economist. In general, downturns in certain sectors of the economy, such as housing, tend to hit banks with a lagged effect, he said.
“Even if the energy crisis went away tomorrow … banks would still suffer with a lot of problems,” Thomas said. “We only see the tip of the iceberg. Things usually get worse, not better.”
Analysts have noted that energy loans typically make up a relatively small share of banks’ lending portfolios. But soured energy loans add to the pile of hurdles banks are dealing with as they seek to raise profits.
Bank of America said its exposure to the energy sector forced it to boost its reserves for possible losses on soured loans by $525 million since the end of last year. All told, the bank says it has amassed about $1 billion in reserves over the past two quarters to cover its total energy-loan portfolio.
Exposure to what Bank of America deems high-risk energy sectors – exploration and production, and oil field services – represents less than 1 percent of the bank’s total loans, the bank noted Thursday. The bank said it had $7.7 billion in such exposure, of which 56 percent is “criticized,” meaning those loans have a higher probability of default or loss.
“We continue to support our energy clients while managing lending limits and actively engaging with stressed borrowers,” Paul Donofrio, the bank’s chief financial officer, told analysts on a conference call Thursday.
Wells Fargo said it added $200 million to its reserves in the first quarter because of continued deterioration in its oil and gas portfolio, which makes up 1.9 percent of the bank’s total outstanding loans. In the first quarter, the bank charged off $204 million in energy-sector loans, more than it charged off in the fourth quarter.
Wells Fargo’s oil and gas portfolio, Chief Risk Officer Mike Loughlin said in a statement, “remains under significant stress.”
BofA maintains expense focus
Another focus for big banks is keeping expenses in check. Bank of America has pushed to reduce its expenses under CEO Brian Moynihan, 56, who took over in 2010.
That focus remains – a point executives made repeatedly on Thursday.
“We’ve just got to drive the costs down,” Moynihan said.
Moynihan has trimmed billions of dollars in expenses from the company in recent years. Steps have included selling and closing branches, divesting businesses and eliminating tens of thousands of jobs through both attrition and layoffs.
On Thursday, the bank reported having 213,183 total employees at the quarter’s end – down by 97 from the end of 2015 and down by 6,475 from a year ago. It employs roughly 15,000 in Charlotte.
Despite such efforts, Moynihan remains under pressure to further cut costs. Analyst Mike Mayo questioned bank executives Thursday on why the bank is lagging peers on certain performance metrics, such as its efficiency ratio.
That is a measure of how much it costs to generate a dollar of revenue. The lower the figure, the more efficient a bank is considered to be. Bank of America’s ratio in the first quarter was 75.1 percent. By comparison, at Wells Fargo it was 58.7 percent.
“Why is Bank of America less efficient than peers?” said Mayo, who in January wrote that the bank’s expense management and weakened stock price put it at greater risk of investors demanding the bank sell off parts of itself.
In response, Donofrio on Thursday pointed to the bank’s accomplishments in reducing expenses but also said more work must be done. Bank of America still has high expenses it wants to cut, particularly in its unit created to handle troubled financial crisis-era mortgages.
Also Thursday, Bank of America executives touted other progress the company has made, including on loans and deposits, which both rose compared with the fourth quarter and a year ago.
The No. 2 U.S. bank by assets said revenue fell about 7 percent to $19.5 billion, which Donofrio attributed primarily to low long-term interest rates and volatile trading markets.
Adjusted earnings per share were 20 cents, 1 cent less than the average estimate of analysts surveyed by Bloomberg. Results were dragged lower by 12 cents from market-related adjustments and retirement costs typical to this time of year.
Wells beats estimates
Wells Fargo, the largest U.S. bank by market value, reported net income of 99 cents a share, down from $1.04 a year earlier. The average estimate of 29 analysts surveyed by Bloomberg was for profit of 97 cents a share.
Chief Executive Officer John Stumpf has sought to keep expenses in check, while increasing deposits and expanding the bank’s loan portfolio with strategic acquisitions. Wells Fargo shares fell 11 percent in the first quarter, the worst quarterly performance since 2011, as interest rates remained near record lows.
“While challenges in the energy industry and persistent low rates impacted our bottom line, our diversified business model was again beneficial to our results,” Chief Financial Officer John Shrewsberry said in a statement.
Wells Fargo employs about 23,300 in the Charlotte metropolitan area, its largest employment hub.
Revenue climbed 3.8 percent to $22.2 billion, Wells Fargo said, beating analysts’ estimates of $21.6 billion. But net interest margin, a measure of profitability, declined.
Bank of America shares rose 2.5 percent to close at $14.14. Wells Fargo fell less than 1 percent to $48.79.
Bloomberg News contributed.