The volatile energy sector is causing some headwinds for banks right now, which lead some to wonder if it would rain on the earnings reports due from major banks this week for the fourth quarter of last year.
For the big banks, there’s no storm yet, but there are clouds on the horizon.
Here’s the problem for the JP Morgans of the world: they made loans to oil producers, and their suppliers.
If oil prices stay low, “The effect will come in two waves,” says Charles Peabody, a banking analyst and partner at Portales Partners. “The first wave will be a slowdown in loan growth.”
Then, if oil prices don’t rise over the next year, Peabody says, there’ll be a wave of loan defaults.
But here’s the thing: the low oil prices will help the consumer banking business. Consumers will have extra cash on hand, while gas prices are low.
“They may be able to spend more, or just have the money to pay back their loan,” says Brian Klock, a bank analyst and managing director at Keefe, Bruyette & Woods.
And Klock says we may very well see a bulge in big bank earnings from consumer spending, before the losses from the oil patch kick in.
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