The higher oil prices stemming from OPEC's agreement to cut crude production should give some banks a boost.
Bank stocks were slammed earlier this year when, among other factors, falling oil and gas prices raised concerns about troubled energy companies' ability to repay their loans. But Wednesday's landmark deal struck by members of the Organization of the Petroleum Exporting Countries—and the resulting jump in oil prices—should help banks and bolster the view that the worst of the oil sector's problems is in the past, analysts said.
In particular, higher oil prices could mean that banks will release some of the reserves they set aside earlier this year to protect themselves against soured energy loans. Such releases would increase banks' earnings. The improving oil-price picture could also mean that banks' credit losses on energy loans will continue to decline, as they did in the third quarter.
"You certainly feel a lot better than you did at the beginning of the year," said Jason Goldberg, an analyst at Barclays.
The oil-price gains are the latest development to boost bank stocks, following higher interest rates, signs of stronger economic growth and hopes for looser regulation under a Donald Trump presidency.
In the past few weeks, shares of some major banks have neared or surpassed their highs since the 2008 financial crisis. The KBW Nasdaq Bank Index jumped 2% on Wednesday to a new postcrisis high. Bank of America Corp. rose more than 4% on the day, Wells Fargo—2%, J.P. Morgan Chase & Co.—1.6% and Citigroup Inc.—1.6%.
Regional banks that are significant energy lenders saw their shares rise, too. Regions Financial Corp. gained 2.7% Wednesday, Comerica Inc. was up 3.2%, Zions Bancorp jumped 3.35% and Cullen/Frost Bankers Inc. was up 2.2%.
OPEC agreed on Wednesday to reduce crude-oil output by 1.2 million barrels a day. Analysts expect the move will boost oil prices to $ 55 or $ 60 a barrel from previous levels below $ 50. The benchmark U.S. oil price soared 9.3% on Wednesday to $ 49.44 a barrel, the biggest one-day percentage gain since February. Brent, the global benchmark, gained 8.8%.
Prices sank below $ 27 a barrel early in 2016, the culmination of a monthslong selloff, leading banks to brace for the possibility of significant losses in their energy portfolios. "Criticized" energy loans—those deemed to have a higher risk of nonpayment—rose sharply. Fifteen of the largest U.S. banks amassed a combined $ 6 billion in reserves for energy loans, according to a Barclays analysis.
But fewer borrowers defaulted than banks had anticipated. By the time third-quarter earnings rolled around in October, bank executives were optimistic that their problems with energy-loans had hit an inflection point. At Wells Fargo, for example, net charge-offs of oil and gas loans fell to $ 168 million in the third quarter, from $ 263 million in the second quarter.
The OPEC agreement strengthens the case that the outlook for banks is improving, analysts say. The pact is a "modest positive" for banks that focus on the energy industry, Evercore ISI analyst John Pancari said in a research note Wednesday. A sustained increase in energy prices, he said, "could provide earnings relief" at those banks by prompting them to release energy-loan reserves, which flow directly into earnings
Some banks have already begun to do so. J.P. Morgan released about $ 50 million in reserves for its oil-and-gas portfolio in the third quarter. "I don't think anybody is saying that the (energy) industry is back on its feet, but we're certainly in a much better place than we were in January," said Douglas Petno, J.P. Morgan's chief executive of commercial banking, at a conference in mid-November.
Some banking regulators think the OPEC agreement will help banks, too. "Certainly things that firm oil prices are going to be welcomed by banks," said Robert Kaplan, president of the Federal Reserve Bank of Dallas, speaking Wednesday to reporters at The Wall Street Journal.
Still, banks remain cautious, conscious that they could face renewed problems if oil prices were to plunge again and stay low. Many have cut their exposure to the energy industry. For example, Wells Fargo's outstanding oil and gas loans declined 6% in the third quarter from the second. Federal Deposit Insurance Corp. Chairman Martin Gruenberg said Tuesday, before the OPEC agreement, that oil and gas prices continued to affect energy-industry borrowers and were part of "a challenging environment" for banks.
In a speech earlier Wednesday, Mr. Kaplan said the OPEC agreement could speed up the point at which oil supply and demand would strike a balance, which the Dallas Fed had forecast would occur by mid-2017. But he also said that, despite firming oil prices, more bankruptcies, restructurings and merger activity in the energy sector are expected.
Write to Michael Rapoport at Michael.Rapoport@wsj.com and Rachel Louise Ensign at rachel.ensign@wsj.com
No comments:
Post a Comment