Earnings reports from Bank of America and Wells Fargo on Thursday underscored anew the challenges facing big banks as they contend with the oil bust and persistently low interest rates.
Lower earnings at both banks showed how the benefits of increased overall lending to businesses and consumers proved insufficient to counteract the hit from increased reserves for bad oil loans and the drag from low interest rates.
The picture was much the same when JPMorgan, the largest US bank, reported Wednesday a profit fall in the first quarter.
And Bank of America and Wells Fargo executives largely echoed the tone of JPMorgan's chief executive, Jamie Dimon, who dismissed the odds of a US recession and viewed broad increases in lending as a good sign for the world's biggest economy.
"While signs of economic uncertainty remain in the global economy, as well as volatility in capital markets, the US economy, which is the primary driver of Wells Fargo's results, continues to be resilient," said chief executive John Stumpf.
"Our overall view of the American consumer and the US economy is that it is slowly improving," said Bank of America chief financial officer Paul Donofrio.
Shares of Bank of America rose 2.7 percent after it reported an 18.1 percent drop in first-quarter income to $2.2 billion.
Wells Fargo dipped 0.2 percent after reporting a 5.9 percent drop in net income to $5.5 billion.
Bank of America, the second-biggest US bank by assets after JPMorgan, boosted its reserves in case of energy defaults by $525 million to $1 billion, as clients in the oil services and exploration and production sectors continue to struggle with the effects of persistently low oil prices.
BofA actually lowered its overall exposure to the most vulnerable subsectors in petroleum by about $300 million by in some cases writing off loans and in others revising terms of collateral positions, Donofrio said.
BofA has an energy exposure of $21.8 billion, equal to about 2.4 percent of its total loan exposure.
"We feel very good about our reserves," said Donofrio.
At Wells Fargo, the number-three bank, results were negatively hit by an increase of $200 million in reserves in case of bad loans to oil and gas companies, a portfolio that "remains under significant stress due to low prices and excess leverage," said Wells Fargo chief risk officer Mike Loughlin.
Wells Fargo has total oil and gas exposure of $40.7 billion, with $17.8 billion of that in loans outstanding.
Wells Fargo chief financial officer John Shrewsberry said the bank's overall exposure was down $1.3 billion from December due in part to cuts in the size of some of the company's credit facilities after their oil and gas reserves were downgraded due to low prices. Wells Fargo has also tightened oversight of real-estate loans in oil-producing regions, he said.
"We are actively monitoring the impact from the disruption in the oil and gas industry in all areas of our business and we're working closely with all impacted customers," Shrewsberry said.
- Interest rate worries -
Several BofA businesses got a lift from the US Federal Reserve's decision in December to raise its key interest rate for the first time in almost a decade. Net interest income surged by 6.4 percent in consumer banking to $5.2 billion, where deposits and loans jumped.
But those gains were more than offset by a negative $1.2 billion hit in some BofA holdings due to an unexpected drop in long-term interest rates in the wake of the Fed's more cautious stance on interest rates since the December liftoff.
"Markets were volatile and long-term interest rates declined significantly this quarter," Donofrio said. "In quarters like this, revenue is going to be challenged."
Wells Fargo enjoyed a 6.2 percent rise in net interest income to $11.7 billion, as the Fed's December rate boosted results. Total loans jumped about 10 percent from a year ago at $947.3 billion.
But Wells Fargo said its net interest margin, the gap between interest income generated by banks and the amount of interest paid out, fell two basis points from the fourth quarter. The figure is an important benchmark of bank profitability.