Around 66 percent of Wells Fargo’s credit lines to energy exploration and production companies have been reduced as a result of the two-year drop in oil prices, The Street reported.
The E&P loans make up more than half of the San Francisco-based bank’s US$17.8 billion in loans to oil and gas ventures. Just under half of the outstanding loans have been vetted so far, according to a presentation by CFO John Shrewsberry on Tuesday.
Major American banks that have offered credit lines to oil and gas companies have seen their stock prices drop as investors become nervous that the debtors would default from price pressures. Not a mad thought as the debt to EBITDA ratio of many distressed U.S. oil drillers is topping 7.0
Shrewsberry said Wells Fargo’s total oil and gas portfolio, including credit lines that have not been used yet, equals US$40.7 billion dollars. Less than a quarter of the serviced borrowers were from investment grade companies, the CFO added. Related: OPEC Head Calls for $65 Oil
Image courtesy: Motley Fool
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However, U.S. banks have something to look forward to this summer as The Federal Reserve Bank has hinted at a potential interest rate hike in June, which could play in favor to Wells Fargo. The Fed’s interest rates have been near zero for nearly seven years.
In the fourth quarter of last year, the Fed had said it might increase interest rates four times this year. But, after the oil price drop again earlier this year, it revised its forecast.
"The prospect for higher rates…helps widen the spread between what banks charge on loans and what they charge on deposits, thus lifting margins and boosting earnings power," Jim Cramer, the owner of the charitable trust that holds Wells Fargo, said.
By Zainab Calcuttawala for Oiprice.com
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