The impact of low oil prices has continued to hobble the finances of U.S. banks, which posted increased loan losses in the first quarter driven by a huge jump in delinquent energy loans.
U.S. bank earnings dipped 2 percent in the first three months of the year to $39.1 billion from $39.8 billion a year earlier, data issued Wednesday by the Federal Deposit Insurance Corp. showed.
Banks posted the biggest quarterly increase – 65.1 percent – in commercial and industrial loans that are 90 days or more past due since the first quarter of 1987. A large portion of the problem loans came in the energy sector, where low oil prices hurt oil and gas producers and made it harder for them to repay their loans.
Big banks were most affected.
Much of the exposure to energy loans sits with the big Wall Street banks, which made billions of dollars in loans during the boom to finance oil production in Texas, North Dakota and elsewhere. The six largest U.S. banks – JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – have billions of dollars of exposure to energy loans that won’t all be paid back.
Falling oil prices over the past couple of years – now around $50 a barrel for crude oil from a $100 high in mid-2014 – have sliced into the profits of energy companies and put projects on hold. As cash flow from oil sales has trickled, some companies are straining to repay their loans.
The energy-related loans on the balance sheets of the biggest banks represent only a small percentage of their overall lending, but the losses have been noticeable.
There also is an indirect impact on smaller and regional banks that operate in areas like Texas and North Dakota and leTnd to businesses dependent on the oil industry – like auto dealers, equipment sellers and hotels and restaurants. FDIC officials said it could take a while for the financial effect on smaller banks to fully show up.
The energy problems for banks come amid a steady recovery in the banking industry since the financial crisis struck in the fall of 2008.
More than half of all banks, 61.4 percent, reported an increase in profit in the first quarter from a year earlier. Only 5 percent of banks were unprofitable.
Also on the positive side, lending showed strong growth. Loan balances grew at the fastest 12-month rate, 6.9 percent, since 2008.
The number of “problem” banks on the FDIC’s confidential list fell to 165 from 183 in the first quarter of 2015. That is the smallest number in more than seven years and sharply below the peak of 888 problem banks in the first quarter of 2011.
“By many measures, the industry had a positive quarter,” FDIC Chairman Martin Gruenberg said at a news conference. “However, banks are operating in a challenging environment.”
“We are seeing a significant impact … from the energy sector,” Gruenberg said. He also noted that banks’ profit margins remain low by historical standards, pressured by the recent prolonged period of low interest rates.
The number of bank failures continues to slow. So far this year, three banks have failed. Five had been shuttered by this time last year. Failures have declined from 24 in 2013 and were down sharply from 157 in 2010 – the most in one year since the height of the savings and loan crisis in 1992.
The decline in bank failures has allowed the deposit insurance fund to strengthen. The fund, which turned from deficit to positive in the second quarter of 2011, had a $75.1 billion balance as of March 31, according to the FDIC. That was up from $72.6 billion at the end of 2015.
The FDIC was created during the Great Depression to insure bank deposits. It monitors and examines the financial condition of U.S. banks. The agency guarantees bank deposits up to $250,000 per account.