Wells Fargo took advantage of its Investor Day this week to rein in growth expectations and warn that more trouble lies ahead in the bank’s energy lending.”Expect continued stress in the oil and gas portfolio in 2016,” CFO John Shrewsberry said in his slide presentation to analysts. “More credit losses will be realized, and there is the potential for additional reserve builds.”
Reflecting the bank’s performance in recent quarters, Wells Fargo, led by Chairman and CEO John Stumpf, tempered growth expectations as the bank and its rivals continue coping with the low-rate environment that hurts the profitability of lending.
Wells (NYSE: WFC) expects return on equity over the next two years to range from 11 percent to 14 percent, down from a 12-to-15-percent range the bank shared with investors in 2014. The bank cut guidance on its return on assets to 1.1 percent to 1.4 percent, from 2014’s guidance of 1.3 percent to 1.6 percent.
Longtime industry observers are carefully following Wells Fargo’s energy woesto see how the bank weathers the storm, given the bank’s long-standing reputation for conservative lending and its diversified business model that has fueled the bank’s status as a powerful economic engine.
After several years of releasing money from credit reserves, Wells built its loan-loss reserves in the first quarter as stress among oil-and-gas borrowers offset continued improvement in consumer lending, particularly among residential mortgage borrowers, Shrewsberry said.
Wells cut credit lines to two-thirds of companies in the exploration and production business, which tends to be more vulnerable to plunging oil prices. The bank has reviewed almost half of its loan portfolio to this portion of the energy sector, according to Shrewsberry.
Wells Fargo’s total oil-and-gas exposure is $40.7 billion as of the first quarter, including untapped credit lines. That’s down $1.3 billion or 3 percent from last year’s fourth quarter due to cuts in existing credit lines and net charge-offs.