Oil bust hits big US banks, but pain appears to be manageable

By John Biers ,AFP

By John Biers NEW YORK — Earnings from large U.S. banks in the first quarter revealed more oil-bust pain, with banks raising reserves for additional bad energy loans and for defaults from related industries, like shipping.

Yet even as giants like JPMorgan Chase and Citigroup revealed a rising tally of costs, investors shrugged off the news, bidding up shares of banks as the financial behemoths reported lower earnings over the last week that still were better than feared. The oil rout constitutes “the biggest test of credit quality since 2008,” said Erik Oja, a banking analyst at S&P Capital IQ.

But Oja said bank investors remain largely confident about the oil hit, in part because bank stress tests implemented in the aftermath of the 2008 financial crisis have strengthened the companies and because energy still only accounts for three or four percent of total loans for large banks. The boost in oil prices by about 30 percent since January has also helped. “People are not panicking over it,” Oja said. “The exposures are nothing compared to the residential mortgages” exposure ahead of the 2008 crisis. Citigroup chief financial officer John Gerspach said the bank has not see signs of contagion from oil to the broader economy. “We haven’t seen any credit deterioration in any of our books outside of that which is energy-related,” said Gerspach after Citigroup lifted its reserves by US$233 million due to energy-related loans. “We’re not seeing any migration of the energy-related issues into the consumer book at all.”