JPMorgan warns of ‘stress’ as oil beats up on banks
The crash in oil prices is creating a big headache for banks.
JPMorgan Chase CEO Jamie Dimon kicked off bank earnings season Thursday by warning of “stress” in energy loans amid falling oil prices.
The superstar CEO walked away from the bearish comment largely unscathed — for now — as shares rose nearly 2% Thursday, to $58.46 each. But Dimon’s remark has Wall Street analysts more attuned than ever to how this could affect earnings elsewhere — and at JPMorgan, if things worsen.
The problem is that oil prices are dropping to their lowest levels since 2003 at about $31 a barrel. Banks that bankrolled the oil boom of the past decade are deal-
“The three big issues in the market right now are oil, oil and oil. As oil prices decline, how much do the banks get hurt?”
Mike Mayo, CLSA
ing with loan portfolios that are worsening in quality.
“The three big issues in the market right noware oil, oil and oil,” said Mike Mayo, a banking analyst with research firm CLSA. “As oil prices decline, how much do the banks get hurt?”
Analysts are watching Wells Fargo, Bank of America, Citigroup and smaller lenders such as Zions Bancorp and Comerica. Wells Fargo and Citigroup report fourth-quarter earnings Friday. Financial companies in the Standard & Poor’s 500 are likely to post 1.4% lower adjusted profit in the fourth quarter, S&P Capital IQ says.
“The overall worst-case scenario is that revenue growth turns negative for 2016, and all the benefits they would get from a wider interest rate spread gets taken away,” said Erik Oja, U.S. banks equity analyst with S&P Capital IQ.
JPMorgan showed clear signs of deterioration from falling oil prices Thursday when it said expenses tied to credit losses, driven largely by soured energy loans, jumped a whopping 49% in the fourth quarter.
The $210 billion bank upped its cushion against troubled oil and gas credits by $124 million in the threemonth period that ended in December. As a result, it increased its reserve on bad loans for the first time since 2011, according to data from S&P Capital IQ.
“You know me, I would put upmore if I could, but accounting rules dictate what you can do,” Dimon said during the conference call with investors.
JPMorgan Chief Financial Officer Marianne Lake said reserves for bad oil and gas loans could jump as high as $750 million. That assumes oil prices continue to hover around $30 a barrel for 18months, which JPMorgan thinks is unlikely, she said.
Despite the decline in oil prices and trouble in China, Dimon sounded an upbeat note on the economy.
“The U.S. economy has been chugging along at 2% to 2.5% growth for the better part of five years now. In the last two years, it has created 5 million jobs,” he said.
“We’re not forecasting a recession. We think the U.S. economy looks pretty good at this point.”