A year after low oil prices led to a surge in loan defaults among energy companies, U.S. banks are facing a new wave of losses -- from lending to retailers hurt by lower consumer spending and a shift to online shopping.
The six biggest U.S. banks -- JPMorgan Chase (JPM) - Get JPMorgan Chase & Co. Report , Bank of America (BAC) - Get Bank of America Corp Report , Citigroup (C) - Get Citigroup Inc. Report , Wells Fargo (WFC) - Get Wells Fargo & Company Report , Goldman Sachs (GS) - Get Goldman Sachs Group, Inc. Report and Morgan Stanley (MS) - Get Morgan Stanley Report -- had at least $350 billion of loans and credit lines to retailers as of year-end 2016, based on an analysis by TheStreet of regulatory filings. That's more than double their combined exposure to the energy industry.
And where energy-loan losses were tempered by last year's rebound in oil prices, the retail industry's woes are more chronic. According to Fitch Ratings, the decline stems from the increasing success of discount stores and the penetration of online retailers such as Amazon (AMZN) - Get Amazon.com, Inc. Report. Standard & Poor's says there has also been an impact from more consumers choosing to make big-ticket purchases like cars, technology and health care instead of buying new clothes.
"The banks will definitely take losses, and definitely the losses will be significant," said Dick Bove, a bank analyst at Rafferty Capital Markets. "It will slow earnings growth."
The potential for retail-industry loan losses could put additional pressure on bank stocks at a time of fading investor confidence in President Donald Trump's plan to deliver big tax cuts and quickly roll back regulations enacted in the wake of the financial crisis. Banking CEOs like JPMorgan's Jamie Dimon have said that some of the rules enacted in recent years are hampering banks from lending more to individuals and businesses and thus hindering economic growth.
The KBW Nasdaq Bank Index, representing shares of the largest U.S. lenders, has tumbled 8.2% in the past three months.
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Teen-apparel chain Rue21 filed for bankruptcy in May, and news reports from Bloomberg and elsewhere indicate that children's clothes seller Gymboree could follow as soon as this month. Other retail-industry debt defaults this year include Limited Stores, BCBG Max Azria and Payless, according to Standard & Poor's.
Fitch has put 11 retailers on its list of loans with significant risk of default over the coming year, including Sears Holdings (SHLD) , Nine West Holdings and True Religion Apparel. Together they account for $5.6 billion of outstanding loans.
Bank of America, Wells Fargo, Citigroup and PNC Financial Services (PNC) - Get PNC Financial Services Group, Inc. Report are among the biggest lenders to Sears, according to regulatory filings from the Hoffman Estates, Ill.-based retailer.
Citigroup had $94 billion of loans and other credit exposures to the retail industry as of year-end 2016, followed by JPMorgan with $86 billion, according to regulatory filings. Bank of America had $67 billion of loans to retailers and another $8.9 billion of real-estate loans linked to retailers. Wells Fargo had $28.1 billion of loans to cyclical retailers, $11 billion of shopping-center loans and $16 billion of retail-related property loans.
Goldman Sachs had $29 billion of "consumer, retail and healthcare" loans on its books, while Morgan Stanley had $11.8 billion of "consumer discretionary" loans.
And not only do retail loans account for more of banks' lending books than the energy industry, the collateral is less secure.
That creates a thornier predicament than in early 2016, when oil's plunge to prices below $30 a barrel forced banks to set aside extra money to cover loan losses. At Wells Fargo, commercial-lending losses nearly tripled last year because of oil and gas loans. Later in the year, crude prices rebounded, helping to mitigate the losses.
Now, according to a Standard & Poor's report on May 17, "credit risk is shifting from the commodity-related sectors to sectors that are more sensitive to consumer spending, such as retail and restaurants."
The assets borrowers use to secure those loans typically lose value far more quickly than collateral from energy firms, according to Rafferty's Bove. Inventory is often sold at deep discounts, and real estate can be difficult to unload. With oil and natural-gas assets, the commodities are easy to price and can be sold rapidly.
"The big difference is that the energy loans are backed by hard assets, oil in the ground, things that are going to maintain value," Bove said. "So the recoveries that you can get in the energy sector, you can't get in retailing."