The head of corporate banking at Wells Fargo, the biggest bank in the world by market capitalisation, has warned of "stresses" in its energy portfolio, as the ongoing slump in the price of oil begins to weigh heavily on servicers and producers.
Kyle Hranicky, who spent nine years at the helm of the Houston-based Wells Fargo Energy Group before rising to head the corporate banking division in May, said that the bank had been in discussions with clients for several months about preserving cash and cutting borrowing limits.
"Some have liquidity to survive the cycle but others will be under significant stress and may be forced to sell assets or recapitalise," he said. "We've been in the energy business for over 30 years, so we're comfortable with cycles. But this one feels deeper and broader and could last longer."
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The oil slump has hit stocks and bonds hard, causing a lot of problems for fund managers over the past year. But the damage is only now beginning to be felt in banks' loan books, where oil services companies, in particular, have been bearing the impact of cuts in the industry. Bankers say that they are cutting exploration and production companies' borrowing limits by an average of 10 to 20 per cent, as the value of their reserves has fallen sharply.
Over the past 18 months the price of oil has fallen by two-thirds, touching a six-year low of $35.16 last week.
Last month a trio of US bank regulators reported that aggregate loans in danger of default to the oil and gas sector had risen to $34bn, five times higher than a year earlier. The annual report, which tracks loans shared around at least three banks, blamed "aggressive acquisition and exploration strategies" since 2010 which have driven up leverage and made many borrowers "more susceptible to a protracted decline in commodity prices".
Overall, loan books at the big US banks are still in decent shape. Keefe, Bruyette & Woods expects net charge-offs (NCOs) as a proportion of loans to fall next year, from an average of 0.61 per cent to 0.59 per cent, at Bank of America, Citigroup, JPMorgan Chase and Wells. That group's average NCOs had peaked at 3.43 per cent in 2009 and 2010.
But at a conference in New York last week, BofA chief executive Brian Moynihan noted that some energy loans had moved to "classified" status — and thus in danger of default — while Andy Cecere, chief operating officer at US Bancorp, the number five lender by assets, said the bank had seen a "modest uptick" in net charge-offs, largely related to energy.
Dallas-based Comerica, one of the banks most exposed to energy, said that it was "carefully monitoring" its energy portfolio but had not seen any losses in its direct exposures. It noted that many of its clients continue to have access to capital markets as well as significant hedges in place throughout next year, which would help offset a prolonged slump in prices.
Energy "continues to be a headwind", said Richard Ramsden, banks analyst at Goldman Sachs.