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James Burgess

James Burgess

James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also…

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U.S. Banks Down 2% On Bad Energy Loans

Wells Fargo Logo

U.S. banks have seen their earnings drop 2 percent in the first quarter of this year as low oil prices have finally turned into unpaid energy loans.

In the first quarter of this year, U.S. bank earnings fell to US$39.1 billion from US$39.8 billion in the same period last year, based on data from the Federal Deposit Insurance Corp., which noted that the largest U.S. banks have been hit hardest.

According to the data, this quarter saw the largest increase in delinquent loans—up 65.1 percent—since 1987. Of those delinquent loans, energy loans represented a significant volume as low oil prices are affecting the ability of producers to make payments. Related: Crude Bounces Back On Pre-OPEC Meeting Rumors

In late May, Wells Fargo cut its credit lines to energy exploration and production companies due to the sustained drop in oil prices. The bank said it was reducing around 66 percent of its energy-focused credit lines, which make up more than half of its US$17.8 billion in loans to oil and gas companies.

On June 1, Wells Fargo announced to put more money aside to cover its ‘bad energy loans’ even as oil prices have rebounded in recent months. The San Fransisco based bank has currently reserved $1.7 billion to cover potential losses on its energy sector loans

Major American banks that have offered credit lines to oil and gas companies have seen their stock prices drop as investors become nervous that the debtors would default from price pressures. Not a mad thought as the debt to EBITDA ratio of many distressed U.S. oil drillers is topping 7.0. Wells Fargo’s total oil and gas portfolio, including credit lines that have not been used yet, equals US$40.7 billion dollars. Less than a quarter of the serviced borrowers were from investment grade companies. Related: Why We Need $120 Oil

Later this month, the U.S. Federal Reserve will publish its evaluation of the country’s largest financial institutions. These are annual ‘stress tests’ intended to determine whether the banks can weather another financial crisis on par with 2008, according to The Street, which noted that analysts expect at least “one or two” of the largest banks to have trouble.

Dallas-based Comerica, for one, is expected to be more conservative this year and reduce capital distribution proposals over energy sector exposure and oil and gas loans, according to The Street.

By James Burgess of Oilprice.com

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