Bank Watch

Bank of America earnings impacted by troubled energy sector

Charlotte-based Bank of America, the nation’s second-largest bank by assets, reported its fourth-quarter results on Tuesday.
Charlotte-based Bank of America, the nation’s second-largest bank by assets, reported its fourth-quarter results on Tuesday. Bloomberg

Bank of America on Tuesday became the latest big U.S. bank to report fourth-quarter earnings that were hurt by troubles in the energy sector, which continues to be rocked by low oil prices.

While cheaper oil prices have allowed consumers to pay less at the pump for gasoline, they remain a concern for banks with outstanding loans to companies involved in the industry.

Bank of America said its net income increased 9 percent from a year ago to $3.34 billion. But the Charlotte-based bank’s profitability was weighed down partly by an increase in the amount of money it set aside for losses on various types of loans, including to the energy industry.

The bank was able to boost revenues to $19.5 billion, from $18.7 billion in the fourth quarter of 2014, as it grew loans and deposits. Earnings per share of 28 cents beat the 26 cents expected by analysts.

For all of 2015, the bank posted a profit of $15.89 billion, as legal costs tied to the financial crisis fell. That was three times the bank’s 2014 results and the highest since Bank of America churned out a record $21 billion in earnings in 2006.

Still, the improved results were clouded by potential losses from energy loans, the latest challenge to banks already dealing with a squeeze on profits from low interest rates. Bank of America’s shares fell about 1.5 percent on Tuesday to $14.24 – the lowest closing price since November 2013 – as stocks for other major U.S. banks also declined.

On Tuesday, Bank of America executives sought to reassure investors worried about the potential damage persistently low oil prices might have on the nation’s second-largest bank by assets.

“We’re very focused on energy, given the volatility in oil prices,” Paul Donofrio, chief financial officer for Bank of America, said on a call with reporters. “We are looking at every loan.”

“We feel like we have done an effective job managing this risk,” he added. “I’m not sending out any red flags.”

Donofrio said only 2 percent, or about $21 billion, of the bank’s loans are tied to the energy sector.

In the fourth quarter, Bank of America set aside $810 million, about four times the level from a year ago, to cover loan losses, including those made to the energy sector. During the quarter, other big banks also increased the amount set aside to cover potential losses on energy-related loans.

Investors are worried that more losses lie ahead if oil prices stay at their current level or fall even further.

Donofrio said Tuesday that if oil prices remained at $30 a barrel for nine quarters, the bank expects potential losses of roughly $700 million. Currently, the bank has reserved $500 million for energy-related losses but is prepared to increase that cushion, he said.

“This isn’t all bad news,” Donofrio said. “It’s bad for companies in certain sectors of the energy market, but it’s good for consumers.”

With 2 percent of its loans tied to energy, Bank of America is among the banks that have the highest exposure to the sector, said Shannon Stemm, a bank analyst with Edward Jones. But that percentage is not concerning, she said.

Last week, Wells Fargo said it had about $17 billion in energy-related loans, around 1.9 percent of loans outstanding. The San Francisco-based bank said its fourth-quarter results were flat compared with a year ago, as it also absorbed higher loan losses tied to the oil and gas industry.

“I think that, for the most part, the banks have probably done a pretty good job of reserving for potential losses in their portfolios,” Stemm said.

Banks might not be prepared yet for further declines in oil prices, she said.

“Oil going below $30 is going to be a risk for these companies because I don’t think they’ve reserved for that,” Stemm said.

Costs still a focus

In a conference call Tuesday, analysts also questioned Bank of America executives on plans for lowering expenses, indicating investors want further cost-cutting at the bank.

Shareholders are paying close attention to Bank of America’s efficiency ratio, which measures expenses as a percentage of revenue.

“A lot of your peers are well below 60,” analyst James Mitchell said during the conference call.

“We’re not satisfied in the mid-60s,” Bank of America CEO Brian Moynihan said. “Don’t think we’re complacent on this.”

Moynihan said the bank continues to drive down its expenses. Some of that has been achieved by layoffs and branch closures, both of which affected Charlotte last year.

Even as it cuts staff in other areas, the bank says it has been adding sales specialists and investing in other areas, like technology.

The bank reported having 213,280 full-time equivalent employees at the end of December, a decline of 1,913 from the third quarter and a drop of 10,435 from the same period in 2014.

Its branch count is at 4,726, a drop of 15 from the third quarter and a decrease of 129 from a year ago.

“Expenses are on our mind every day at Bank of America,” Donofrio said. “We have everybody focused on expense discipline.”

As expected, Bank of America’s results included a previously disclosed $600 million charge related to the buying back of securities tied to its 2009 Merrill Lynch acquisition.

Deon Roberts: 704-358-5248, @DeonERoberts