Oil collapse drags on Citigroup, Wells Fargo earnings

New York (AFP) - Earnings from US banking giants Citigroup and Wells Fargo showed an increased drag from the oil rout on Friday that investors fear will worsen.

Both banks lifted their reserves in case of defaults from energy companies, a sign of how months of low oil prices have pinched clients in the petroleum business.

Highlighting the threat, oil prices finished below $30 a barrel for US benchmark WTI crude for the first time since 2003 on Friday, while the London contract for Brent crude dipped even farther, ending below $29.

Both are down by more than half from a year ago and more than 21 percent since the end of 2015, and that is hitting a broad swathe of companies: oil, gas and coal producers, refiners, pipelines, and service companies.

Banks' exposure to oil is a "major concern" until oil prices stabilize, said Erik Oja, a banking analyst at S&P Capital IQ.

"The fact that oil has not yet found a bottom is making people worry that world growth is weaker than expected."

Citigroup reported fourth-quarter 2015 earnings of $3.3 billion, nearly 10 times the level in the year-ago period.

Yet shares fell 6.1 percent in afternoon trade after it said it set aside $250 million in additional reserves for the energy portfolio, nearly equal to the $280 million the bank held in combined reserves for the first three quarters of 2015.

The higher reserves "are reflecting our view that oil prices are likely to remain low for a longer period of time," Citigroup chief financial officer John Gerspach said in a conference call analysts.

Gerspach said the bank had set aside about another $150 million for "macro concerns," unspecified potential losses that could stem from the negative impact of the oil rout on other sectors, or from other macroeconomic problems.

"We haven't seen any real knock-on effects as yet broadly across the rest of the portfolio," he said. "There may be knock-on effects that show up later."

Gerspach said Citigroup's overall exposure to energy stands at about $58 billion, down about $2 billion from October. About 68 percent of the portfolio is investment grade, he said.

- Wells Fargo also hit -

Wells Fargo shares fell 3.8 percent after the bank reported flat fourth-quarter earnings of $5.7 billion. The bank said it suffered higher oil and gas losses of $90 million in the quarter and warned of deeper losses in 2016.

"It takes time for losses to emerge," Wells Fargo chief financial officer John Shrewsberry said on a conference call. "In the current price levels, we would expect to have higher oil and gas losses in 2016."

Wells Fargo executives said total energy loan exposure stands at $17 billion, only about two percent of the overall portfolio.

Their announcements came on the heels JPMorgan's results Thursday, which included $86 million in reserves following downgrades in energy and metals loans. JPMorgan also signaled it expects "incremental" increases in reserves in the coming quarters due to weak oil prices.

Gregori Volokhine, president of Meeschaert Capital Markets, said the oil rout is "not a systemic risk" for banks or the broader US economy.

But Volokhine said the banks' disclosures were concerning because many market-watchers believe they should be much higher given the downturn in oil.

Based on trades in credit default swaps, which measure the risk of defaults, many market participants believe about 20 percent of oil companies will ultimately default on borrowings, Volokhine said.

"People are worried about what they are hiding," he said.

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