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US banks' profits hit by oil price fall

BBC News BBC News 14/04/2016
Bank of America promotional sign in busy street: Bank of America's profits jump on lower legal costs © Getty Images Bank of America's profits jump on lower legal costs

Bank of America and Wells Fargo have both reported a fall in first-quarter profits after they put aside more cash to cover bad loans to energy firms.

Net income fell 13% to $2.7bn (£1.9bn) at Bank of America, while Wells Fargo said net income dropped to $5.5bn in the first three months of the year.

Bank of America said provisions for loan losses had risen 30% to $997m.

Similarly, Wells Fargo set aside $1.1bn to cover potential loan losses, almost double its $608m provision a year ago.

The sharp rise in funds put aside to cover potential loan losses shows how the plunging oil price - which has dropped by two-thirds since June 2014 - is hitting big banks.

About a third of publicly traded oil and gas-related companies, with more than $150bn in debt, are at high risk of bankruptcy this year, according to a report by accountancy firm Deloitte.

Feeling good

Bank of America, one of the biggest lenders to the oil sector, said it had some $21.8bn worth of exposure to the sector at the end of March.

But Bank of America's chief financial officer said he was not concerned about its exposure.

"The bank feels very good about its energy reserves," Paul Donofrio said, speaking after the results.

US shale oil companies have come under increasing pressure in the past year as the price of oil has plummeted.

That has forced banks to raise the money they set aside to cover the possible failure of energy firms.

On Wednesday, JP Morgan Chase reported a 6.7% drop in quarterly profits as it set aside more funds to cover potential losses at oil and gas companies.

Other factors are also hurting the banking industry, including the low interest rate environment and a slowdown in global growth, particularly in emerging markets.

Bank of America, whose shares have fallen almost 20% so far this year, is under pressure to demonstrate it can generate consistent improvements in earnings and revenue.

Chief executive Brian Moynihan said the bank would continue to focus on "loan and deposit growth and managing expenses".

"Despite volatile markets, our global markets business produced solid earnings," he added.

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