Soured loans to companies jumped 67 percent at the three biggest U.S. banks in the first quarter, the latest sign that corporate credit quality is eroding after energy prices plunged.
At Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., bad loans to companies reached their highest levels since at least 2013. For now, weakness is mainly confined to oil and gas and related industries, executives said. U.S. crude has tumbled more than 60 percent since June 2014, although they have rallied since February.
... Charles Peabody, a banking analyst at Portales Partners, downgraded JPMorgan to "underperform" from "market perform" in February in part because of concerns about the potential for mounting credit losses.
"We’re at the very early stages of an inflection point in corporate credit quality, and it’s getting worse from here," Peabody said.
Pri de Silva, an analyst at CreditSights, is among those who see current credit problems as limited to oil and gas and related industries.
"At this point, I don’t see much contagion," he said.
Banks have been getting ready for loans to deteriorate -- the industry added $1.43 billion in the fourth quarter to the total money it has set aside to cover bad loans, according to Federal Deposit Insurance Corp. data compiled by Bloomberg, the first time banks in aggregate added to reserves since 2009. Banks usually classify loans to companies as "nonperforming" after the borrower is delinquent for 90 days. Loans that are unlikely to be repaid are also typically designated as "nonperforming."
Now loans are actually souring. At JPMorgan, bad loans to companies more than doubled to $2.21 billion from $1.02 billion in the fourth quarter, according to company filings. Bank of America said they rose 32 percent to $1.6 billion. And at Wells Fargo, they rose 64 percent to $3.97 billion, which includes $343 million from loans it acquired from GE Capital.
The increase in bad loans to companies mirrors the increase in defaults in corporate bonds. Default rates for U.S. high-yield bonds have been rising since early 2015, and are on pace to reach around 3.9 percent in April, up from 2.1 percent in the same month last year, according to Fitch Ratings.
U.S. regulators fail 'living wills' at five of eight big banks
U.S. regulators gave a failing grade to five big banks on Wednesday, including JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N), on their plans for a bankruptcy that would not rely on taxpayer money, giving them until Oct. 1 to make amends or risk sanctions.
The move officially starts a long regulatory chain that could end with breaking up the banks. Nearly a decade after the financial crisis, it underscored how the debate about banks being "too big to fail" continues to rage in Washington and exasperate on Wall Street.
"The FDIC and Federal Reserve are committed to carrying out the statutory mandate that systemically important financial institutions demonstrate a clear path to an orderly failure under bankruptcy at no cost to taxpayers," FDIC Chairman Martin Gruenberg said in a statement. "Today's action is a significant step toward achieving that goal."
But the agency's vice chairman, Thomas Hoenig, who was a voting member of the Federal Open Market Committee during the crisis, said the plans show that no firm is "capable of being resolved in an orderly fashion through bankruptcy."
"The goal to end 'too big to fail' and protect the American taxpayer by ending bailouts remains just that: only a goal," he said.
The three remaining large, systemically important banks, which the U.S. government considers "too big to fail," did not fare much better in their evaluations, but sidestepped potential sanctions because they were not given joint determinations.
The FDIC alone determined the plan submitted by Goldman Sachs (GS.N) was not credible, while the Federal Reserve Board on its own found Morgan Stanley's plan not credible. Citigroup's (C.N) living will did pass, but regulators noted it had "shortcomings."
Goldman Sachs said in a statement it has made "significant progress" and Morgan Stanley said resolution planning is one of its "highest priorities."
"This Sucker Could Go Down" - Bush the Lesser - Sep. 26, 2008