Wall Street firms are setting aside more cash to cover loans that have gone bad, notably in the energy sector. The pain is spreading.
JPMorgan said Thursday it is setting aside more money to cover bad loans made to energy and mining companies.
In its quarterly earnings report, the bank said it set aside $1.3 billion, or 49 percent more year over year, for credit loss provisions, "driven by downgrades, including $124 million in the oil & gas portfolio and $35 million in metals/mining." Credit costs, driven by the oil and gas industry, increased as well, the bank said.
In spite of this, JPMorgan executives appeared to play down concern.
"Our energy book isn't that large," CEO Jamie Dimon said on the bank's earnings call with analysts. "We're not forecasting a recession; we think the U.S. economy looks pretty good at this point."
Not everyone on Wall Street is optimistic that distress is only being felt by companies dependent on commodities.
"It's not contained" to just the energy sector, said KKR's co-head of credit, Nat Zilkha. He said other sectors that have suffered credit quality declines include retail, which in part has been beset by online competitors taking foot traffic from malls, and health-care services firms, among others.
JPMorgan CFO Marianne Lake told analysts on the bank's call that it may again increase loan loss reserves, depending on commodity price fluctuations.
Banks are continuing to sell off reserve-based loans they had kept on their books, to a growing number of distressed secondary buyers, according to a sector banker who spoke with CNBC.com and asked to not be quoted directly because his firm is still in a pre-earnings quiet period. The banker said he expects other banks to increase their reserves to offset bad loans as the past quarter's results are announced this week and next.
Regardless of banks' reserves, companies in the energy sector have already been hit hard.
"Thirty-five Moody's-rated corporate issuers defaulted in the fourth quarter of 2015, up from 24 in the third," Moody's Investors Service said in a report Wednesday. "Not surprisingly, oil and gas, the most troubled sector in 2015, contributed more than 30 percent of defaults in the fourth quarter."
The report said the global speculative-grade default rate for borrowers rose to 3.4 percent in the fourth quarter of 2015, an increase from 2.3 percent the previous quarter. Still, it remains far short of the full-year 2008 global speculative-grade default rate, which was 5.8 percent.
JPMorgan isn't the only bank to boost provisions for loan losses as low commodity prices have created distress in the energy sector. Regional banks BOK Financial and Associated Banc-Corp have also increased capital they are setting aside to cover bad loans.
JPMorgan executives say they expect a change in deal activity this year, irrespective of whether commodity prices rebound.
Lake said the bank expects that "the types of deals we'll see in 2016 will be different" than the spate of megamergers and acquisitions that came to characterize 2015. When an analyst followed up on the statement, she specified smaller deals may become more common as big M&A transactions begin to subside this year.