Wells Fargo is telling investors to brace for more losses on loans to energy companies.
That, in turn, increases the likelihood that the bank will continue to bolster its reserves to offset those losses, the bank said at its investor day presentation Tuesday in California.
"We built our reserve in the first quarter" correlated with rising stress in the energy sector, Chief Financial Officer John Shrewsberry said.
Further reserves may need to be built in order to offset losses, Wells Fargo said in its presentation. Shrewsberry said that other sectors' credit quality remains strong. The bank has completed what he said was "more than half" of the bank's spring borrowing base redetermination, or its assessment of energy sector borrowers, which is in part based on the value of its reserves.
Nearly 70 percent of the bank's energy-sector borrowers saw decreases in lines of credit, Shrewsberry said. In the long run, that could help the bank stave off some losses on loans in the sector.
Analysts recently expressed worry about the bank's energy lending portfolio. The bank's shares rose more than 1 percent Tuesday as markets saw broader gains; Wells Fargo's stock is down about 9 percent in 2016.
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"We still continue to believe that energy exposure is a major overhang on the shares of Wells Fargo, despite the recent increase in the price of oil," Keefe, Bruyette & Woods analysts wrote in a note this week. "[T]here is a fear in the market that bankruptcies and restructuring in the energy sector will increase and Wells may be disproportionately affected by the increase given the growth the company saw within middle market energy credits."
With a balance of $17.8 billion — much of that, dedicated to extraction and field service companies, which are typically susceptible to commodity price pressure — Wells Fargo's energy exposure lags only those of Citigroup and Bank of America, according to an analyst report from SNL Financial earlier this month.
The bank's exposure to noninvestment grade debt in the sector, or to borrowers of poorer credit quality, is 93 percent, meaning that the potential for losses and failures could be greater, SNL said.
However, some analysts have taken a more optimistic outlook for Wells Fargo, after seeing oil prices rise after a rough start to 2016.
"Exposure to the energy sector is considerable," Credit Suisse analysts wrote in a recent report, adding, "this we believe to be a manageable risk."