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Is the recent woeful performance of US banks a portent for their UK counterparts?

The biggest US banks recently reported a torrid set of Q1 results. Is this a sign of things to come for the UK banking sector?
April 21, 2016

The damage wrought by plunging commodity prices to companies with exposure seems never ending. After backing oil and gas producers when prices were booming, banks globally have become natural victims of the industry's downturn. Three of the biggest US banks have reported large hits to their energy portfolios, forcing them to bump up their reserves to deal with defaulted loans.

Wells Fargo increased its reserves for energy losses to $1.7bn at the end of its first quarter, up from $1.2bn at the end of December 2015, with 9.3 per cent of loans to the sector outstanding. Meanwhile non-accrual loans - considered more likely to default - more than doubled to $1.9bn, with management citing weaker cash flow expectations for borrowers and the run-off of hedges. The bank is one of the most heavily exposed in the US, with almost half its $40.7bn oil and gas exposure to extractors. However, management has stressed that delinquency rates in consumer portfolios in states such as Texas, Oklahoma and the Dakotas are in line with nationwide averages.

Bank of America (BAC) told a similar story, beefing up its energy reserves by $525m during the first three months of the year to $1bn. This was primarily driven by exposure to higher-risk exploration and production as well as off-field services industries. However, the bank's overall energy exposure decreased by $0.3bn to $21.8bn year on year. What's more, the ratio of the group's bad loans compared with its broader loan book fell to 0.48 per cent, indicating that the stress of weak commodity prices has not spread to other areas of lending.

Just a day earlier JPMorgan Chase revealed that provisions for credit losses had shot up to $304m during the same period, from just $61m in the previous quarter. A large chunk of this reflected higher reserves for oil and gas and natural gas pipeline lending. Management added $529m to its reserve buffer and said it could add another $500m by the time the year is out.

US-listed banks have seen substantial falls in their share prices during the past 12 months, although not as huge as their UK counterparts. Morgan Stanley and Citi have been the worst hit, down 28 per cent and 13 per cent respectively over the past year.

The good news for investors in UK-listed banks is that the sector as a whole is not as exposed to the downturn in the oil and gas sectors as lenders across the pond. However, two banking groups stand out. HSBC (HSBA) and Standard Chartered (STAN) are at the greatest risk of getting burnt by making loans to companies within the sector. HSBC was forced to book an extra $200m in loan impairment charges as a result of lending to the oil and gas sector, with total allowances of $600m. The bank had drawn risk exposures - i.e. loans - to the commodities sector amounting to around $29bn in 2015, compared with $34bn in the previous year.

Falling commodity prices have also dampened the prospects for Standard Chartered. Bad loans blew a hole in the Asia-facing bank's balance sheet last year, after it was forced to book $3.2bn in impairments on loans last year. Coupled with a slowdown in business in India, weak commodities were to blame. This is unsurprising given the banking group's disproportionate $43.2bn commodities-related exposure.