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Rising Oil Prices Are a Positive Catalyst for Bank of America

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Sep. 27 2016, Updated 9:04 a.m. ET

BAC’s energy exposure

US banks (XLF) have had a rough start to the year as oil prices have continued to plunge. Major banks such as Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), and JPMorgan Chase (JPM) have large oil and gas loan portfolios.

Banks with direct exposures to the energy sector are more vulnerable to falls in oil prices. Bank of America’s exposure to the energy sector was $21.2 billion in 2Q16, making up 2.4% of total loans. Against these, the bank has 4.7% energy reserves. Refer to Energy Loans Spell Trouble for Bank of America’s Earnings for our discussion on the impact of falling oil prices on the bank’s first-quarter earnings.

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In 1Q16, Bank of America more than doubled its provisions for loan losses in the energy sector to $997 million from $525 million at the end of 2015. The rise in provisions was driven by Bank of America’s exposure to high-risk energy subsectors such as exploration and production and oilfield services.

These sectors are more dependent on oil prices and hence carry more risk. Loans to these sectors make up 35% of Bank of America’s total energy exposure. In 2Q16, oil prices recovered, and risks related to defaults on these loans fell. However, Bank of America continued to build on reserves to protect against loan losses. During the quarter, provisions for energy loan losses stood at $1 billion, representing 4.7% of total energy loans outstanding.

Bank of America, with its large exposure to oil and gas loans, stands to benefit directly from the recovery in oil prices.

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