Wells Fargo & Co. has been one of Warren Buffettâs most treasured investments. But the San Francisco bankâs exposure to oil-and-gas companies, as crude futures have lost two-thirds of their value since a 2014 peak, is making it more of a problem child.
On Thursday, Wells Fargoâs
Â results showed a 5.9% drop in first-quarter profit, but most alarming was a 57% increase in the first quarter of loans the bank says are in danger of defaulting, from 38% in the fourth quarter.
The bankâs exposure to energy loans is relatively high compared with its peers, and as a result investors reacted swiftly by selling its stock, which closed off 0.5% Thursday. Meanwhile, all of its rivals finished sharply higher.
Over the past week, Wells Fargo has lagged behind its rivals, which have enjoyed a bit of a recovery as the worst fears about oil-fueledÂ defaults and persistently low interest rates havenât entirely crushed financial firms. So far, Wells Fargo is up 4% this week compared with a weekly gain of 8.5% for J.P. Morgan Chase
a 10% weekly climb for Bank of America Corp.
a more than 11% rise for Citigroup
and 10% jump over the same period for Morgan Stanley
The bank-focused exchange-traded fund PowerShares KBW Bank Portfolio
also saw a 7.6% advance this week, and the Financial Select Sector SPDR ETF
advanced 4.4% this week.
Crudeâs unraveling price â although West Texas Intermediate oil futures
have recovered from its worst levels since Feb. 11 â led Wells Fargo to add $200 million in the first quarter to cover souring loans on its books. The bank also said it increased by 75% to $204 million the amount of loans that have gone bad and that it doesnât expect to be able to recover, as the following chart shows.
Its nonperforming loans in the oil-and-gas sector more than doubled to $1.9 billion from the fourth quarter.
Wells Fargoâs total exposure to the oil-and-gas sector stands at $40.7 billion, with $17.8 billion of oil-and-gas loans outstanding. Itâs worth noting that itâs nearly $18 billion of outstanding oil-and-gas debt represents just about 2% of its total outstanding loans, as the following chart illustrates:
Concerns about the lenderâs oil-and-gas and exploration-and-production business led prominent bank analyst Mike Mayo of CLSA to dial back his price target to $60 a share and his full-year earnings estimate by about 5% to $4.10. He lowered by 30 cents, or 7%, his 2017 full-year estimate for the bank to $4.40. He is expecting Wells to reserve an additional $75 million over the next several quarters as lower oil prices continue to dog the energy sector.
âEnergy remains a risk for Wells because of its exposure to noninvestment-grade energy loans, which raises the degree of scrutiny for the bank,â Mayo told MarketWatch.
Wells Fargo is expecting continued pain in the sector.
âWe currently anticipate further deterioration and while we remain committed to serving our customers, weâve tightened our underwriting standards across our consumer portfolios in oil-dependent regions,â Wells Fargo CFO John Shrewsberry said during a Thursday call with analysts to discuss its results.
Energy weakness may have overshadowed results that were otherwise better-than-expected, showing a 4.3% rise in revenues to $22.2 billion. That compares with declines at its two largest rivals, Bank of America, which saw its revenue fall to a little over 1% to $19.51 billion from $19.73 billion, and J.P. Morgan, which posted a revenue drop of 3% to $24.08 billion on Wednesday.
The slump in Wells Fargo, which is considered among the bellwether banks for housing and other consumer debt, is dinging Berkshire Hathaway Inc.âs
Â Buffett, who used the firmâs recent slump over the past year to boost his stake last quarter. Buffettâs investment vehicle now owns 10% of the bankâs common stock, making it the single-largest shareholder.
To be sure, Wells Fargo is still widely viewed as best in breed in the banking universe, which was able navigate the 2008 financial crisis better than most. Although it has seen better days, it is still faring better than many of its rivals over the longer run. Its shares are off 10% year to date but that is better than all but J.P. Morgan, down 5.2%, so far this year, among the big six firms.
In the long run, Mayo and others are optimistic about the bankâs ability to wade through its energy woes.
âThese issues in energy are potential red flags that might mean little to nothing in terms of eventual losses. Wells has a historically had a strong credit culture and they tend to focus on the individual credits more than others,â Mayo said.
That may be what the notoriously patient Buffett is counting on, as he took the opportunity to buy more Wells Fargo stock last month as prices fell, even though heâs already lost about $3 billion on his investment this year.