By Dan Freed
NEW YORK (Reuters) - U.S. banks may start preparing for higher loan losses in the coming quarters, after plunging oil prices have made oil producers more likely to default on loans, analysts said.
To prepare, banks are expected to set aside more money to cover bad loans, known as "provisioning," when they post results in the next few quarters. Big U.S. banks start posting second quarter results next week, with JPMorgan Chase & Co (N:JPM) and Wells Fargo & Co. (N:WFC) reporting on Tuesday.
The move will cut into earnings, and may be an early sign that credit quality among U.S. borrowers is no longer improving after the financial crisis, representing a shift in the credit cycle. Banks for years have been setting aside less and less money to cover credit losses, as companies and consumers defaulted less frequently on a wide variety of loans.
Analysts cautioned that higher provisions do not necessarily imply that credit is broadly deteriorating.
"We're kind of trying to thread a needle here because on the one hand we don't want to dismiss this situation but on the other hand this is not a catastrophic 'oh my God here we go again,'" said Gerard Cassidy, analyst at RBC Capital Markets.
There are some storm clouds in the global macroeconomy now, including slower growth in China and the threat of a Greek exit from the Eurozone. Barclays (LONDON:BARC) Capital analyst Jason Goldberg wrote Friday that he sees little direct impact to U.S. bank loan books from those events.
At least one reason for higher provisions is actually a positive for economic growth: banks are making more loans, Goldberg told Reuters.
"I think the credit environment is still good," Goldberg said.
Annual provisions at Wells Fargo peaked at $22 billion (14 billion pounds) in 2009 and have declined each year to about $1.4 billion in 2014. At Bank of America the number fell to roughly $2 billion from more than $48 billion over the same period.
Oppenheimer analyst Chris Kotowski forecasts rising loan loss provisions for both banks in the second quarter, as well as JPMorgan. He is looking for a slight decline in provisioning at Citigroup (NYSE:C), however.
The price of oil
Loans to the energy sector account for 5.7 percent of total loan exposure at JPMorgan, the largest among the big four U.S. banks, according to a report Cassidy published July 9. It accounts for 3.5 percent of Citigroup's exposure, 2.5 percent at Bank of America Corp (NYSE:BAC) and 2.1 percent at Wells Fargo.
Other big lenders with even larger exposure to the energy sector as a percentage of their overall portfolios are Zions Bancorporation (O:ZION) and Comerica Inc (N:CMA) at 7.9 percent and 7.3 percent, respectively, according to Cassidy's report. A Wells Fargo spokesman did not respond to questions. Spokespeople at the other banks declined to comment on upcoming earnings.