Energy Sector Weighs Down Bank Earnings in Early 2016: FDIC

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By Jeff Bater

June 1 — Larger banks in the U.S. compressed industry profits in the first three months of 2016 by setting aside more money to cover possible future losses from the oil sector slowdown.

Commercial banks and savings institutions backed by the Federal Deposit Insurance Corp. (FDIC) reported aggregate net income of $39.1 billion during the first quarter, down $765 million, or 1.9 percent, from the same quarter a year earlier, the agency said in a report that also showed rising industry revenue, loan growth and only one bank failure.

In its quarterly profile of bank earnings, the FDIC attributed income weakness to a nearly 50 percent increase in provisions for loan and lease losses — up by $4.2 billion compared with the first quarter of 2015 to a level of $12.5 billion.

Hedge Against Possible Loss

“The decline in net income reported this quarter was largely due to a sharp increase in reserves at larger institutions to recognize potential losses from noncurrent commercial and industrial loans related to the energy sector,” FDIC Chairman Martin Gruenberg said.

The increase in noncurrent loan balances marked a first in six years. The amount of loans and leases that were noncurrent — 90 days or more past due or in nonaccrual status — rose $3.3 billion, or 2.4 percent, during the first three months of 2016. Noncurrent loans to commercial and industrial borrowers increased $9.3 billion, or 65.1 percent.

Falling Oil Prices

“Low energy prices have led to a sharp increase in noncurrent loans to oil and gas producers,” Gruenberg said.

Net charge-offs of loans to commercial and industrial borrowers were $1.1 billion, or 144.7 percent, higher than a year prior, with total net charge-offs of all loans $1.1 billion, or 12.3 percent, higher than in the first quarter of 2015.

A banking industry group, the American Bankers Association (ABA), said the report showed most institutions saw an increase in earnings but that banks continue to suffer from the lingering effects of the slowdown in the oil and gas sector and weaker-than-expected growth in the economy.

“While the first quarter wasn’t one for the record books, it was a solid one for banks by any historical measure,” ABA chief economist James Chessen said in a statement.

Banking Industry Reaction

The Federal Reserve recently said it found banks are tightening lending policies on companies in the energy sector (85 Banking Daily, 5/3/16). According to its April 2016 senior loan officer survey on lending practices, the Fed said domestic and foreign banks reported taking a variety of actions to mitigate loan losses over the past year, including tightening lending policies on new loans or lines of credit made to firms in this sector, restructuring outstanding loans, requiring additional collateral, and setting aside additional reserves for a potential increase in loan losses.

The ABA characterized the increase in provisioning against possible losses by banks in the first quarter as “prudent management.”

“Banks’ exposure to the oil and gas industry is small and won’t restrain them from continuing to meet the credit needs of businesses and individuals,” Chessen said.

On the Bright Side

The FDIC report showed banks had a net operating revenue of $173 billion in the first quarter, 2.7 percent higher than a year earlier. Total loan and lease balances rose 1.1 percent during the first three months of 2016.

“The mixed first-quarter results reflect an evolving economic environment,” Gruenberg said. “A prolonged period of low interest rates has narrowed margins and caused some institutions to reach for yield. More recently, low energy prices have led to a sharp increase in noncurrent loans to oil and gas producers. The full impact of low energy prices on the banking industry remains to be seen, particularly for consumer and business loans in energy-producing regions of the country.”

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Mike Ferullo at mferullo@bna.com