Wells Fargo Energy Industry Exposure Weighs On 1Q Results (NYSE:WFC)

The amount of money that Wells Fargo has set aside as provisions for souring loans in the energy industry has weighed down the company’s results for the first quarter of its fiscal year. Provisions for bad loans surged nearly 80 percent to $1.09 billion. Wells Fargo reported that its quarterly net chargeoffs increased $178 million year-over-year, rising to $886 million. The bank also reported $200 million in additional reserves for credit losses. A year ago, the company reported a $100 million reserve.

The energy industry has been pummeled as oil prices have fallen by two-thirds over the past two years. Wells Fargo has said that nearly 2 percent of its loans are to the energy industry with roughly $17.8 billion in outstanding loans to the industry at the end of the first quarter. The bank has roughly $25 billion in further energy exposure from lending commitments, such as un-drawn credit facilities, for a total of $42 billion in exposure, mostly to sub-investment grade rated corporations.

According to auditing and consulting firm Deloitte, roughly one-third of listed oil and gas-related companies are at high risk of bankruptcy this year. This represents more than $150 billion in debt. Speculative-grade rated drillers are all but locked out of debt and equity markets, so they must rely on their production cash flows and existing credit. Many companies in the industry won’t be able to survive. Both Peabody Energy Corp, the biggest U.S. coal miner, and Energy XXI Ltd, a major oil and gas producer, filed for bankruptcy this week.

Even with the increased provisions for bad loans, Wells Fargo surpassed lowered analyst estimates of revenues and profits for the first quarter. Net income was $5.09 billion, or 99 cents per share, higher than Wall Street’s expectations of a profit of 97 cents per share. The company reported total revenue of $22.2 billion for the quarter. This was 4.3 percent higher than reported in the same quarter of last year and beat analysts’ estimates of revenue of $21.6 billion. Net interest income rose 6.2 percent to $11.7 billion, while expenses increased 4.2 percent to $13 billion.

Wells Fargo’s community banking operation reported $3.3 billion in quarterly net income, a 7 percent decline. Its mortgage banking revenue rose 3.3 percent, to $1.6 billion, in the quarter, while residential mortgage loan originations were $44 billion. Shares in Wells Fargo fell 1 percent in pre-market trading, dropping to $48.55. The bank’s stock has fallen nearly 10 percent year-to-date.

 

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