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Q1 Earnings: 1 Number to Watch at JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup

By John Maxfield - Apr 5, 2016 at 8:20AM

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Energy exposure is bound to be a major story line for first-quarter bank earnings.

Souring loans from the energy industry are widely expected to depress bank earnings this year. Image credit: iStock/Thinkstock.

When the nation's biggest banks report earnings over the next two weeks, there is one number that I'll be watching particularly closely: their exposure to the energy industry. This is bound to be a key factor weighing on the first-quarter performances of JPMorgan Chase (JPM 1.41%), Bank of America (BAC 0.95%), Wells Fargo (WFC 0.64%), and Citigroup (C -0.87%).

There are two ways to measure these banks' direct exposure to the oil and gas industry. The first is to look at the value of outstanding loans. Bank of America leads the way in this regard, with $21.3 billion worth of loans to energy companies. Citigroup is second with $21 billion, and Wells Fargo and JPMorgan Chase round out the group with exposures of $17.4 billion and $13.3 billion, respectively.

Data source: JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup.

But looking at loans outstanding only tells half the story. That's because all four of these banks have made commitments to energy companies to lend them more money in the event it's needed. In addition to Citigroup's $21 billion in outstanding loans, for instance, it also has $37 billion in unused credit facilities that could be drawn on by clients in the industry that are running out of capital and liquidity. Citigroup's total exposure, then, could actually end up equating to $58 billion.

The other three banks also have large revolving credit facilities that could soon be tapped by desperate borrowers. Bank of America's adds up to $22.6 billion, bring its total exposure to $43.8 billion. Unused credit lines at JPMorgan Chase come out to $28.8 billion, bringing its total to $42.1 billion. And the figures at Wells Fargo are $24.6 billion and $42 billion, respectively.

SunTrust Banks, a major lender in the Southern United States, highlighted this threat in its latest annual report, noting that "as energy clients evaluate their cash flow needs it is possible that outstanding loans could increase as clients draw against their unfunded commitments."

The good news, to the extent there is any, is that even once unused credit facilities are included, the nation's biggest banks appear to be more than adequately diversified and capitalized to absorb elevated losses on their energy portfolios. Only between 1.5% and 3% of these banks' loan portfolios are allocated to the sector, according to The Wall Street Journal, and most big banks have already begun to set aside substantial reserves in the event of future losses.

Wells Fargo serves as a case in point. It has a $1.2 billion allowance for credit losses allocated for its oil and gas portfolio, equating to 6.7% of total oil and gas loans outstanding. Meanwhile, its nonaccrual oil and gas loans as of the end of last year were only $844 million. The latter figure is bound to increase, but so too will Wells Fargo's provisions in anticipation of future losses.

In sum, while these losses won't sink any of the nation's leading banks, investors in bank stocks should prepare themselves for the negative impact that an ailing energy industry is bound to have on banks in the first quarter and beyond in 2016.

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Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
$53.62 (-0.87%) $0.47
Bank of America Corporation Stock Quote
Bank of America Corporation
$37.02 (0.95%) $0.35
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$131.27 (1.41%) $1.83
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$45.89 (0.64%) $0.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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