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January 20, 2015

Improving economic conditions increase loan volume and performance, for now

U.S. economic conditions have been steadily improving, and this development has helped bolster the performance of major banks such as Wells Fargo, whose executives have been rather vocal about how much faith they have in the nation's recovery. 

The financial institution, whose performance hinges largely on the strength of the world's largest economy, announced its fourth quarter fiscal results Jan. 14, according to American Banker. During the period, Wells Fargo enjoyed a 4 percent year-over-year increase in revenue and generated $5.7 billion in net income. On a conference call with analysts, CEO John Stumpf took the opportunity to emphasize that in 2014, the nation's employers drove the strongest jobs growth in 15 years.

Potential economic headwinds
In addition to highlighting the positive, he spoke to potential headwinds that could undermine the company's earnings in 2015, American Banker reported. Compliance costs, rising credit losses and low oil prices could all affect financial results, both Stumpf and chief financial officer John Shrewsberry noted.

Energy prices fell sharply last year, and many other commodities experienced declines, The New York Times reported. As a result, American consumers have enjoyed cheaper electricity, natural gas and fuel oil.

Falling oil prices
However, Shrewsberry noted that oil and gas companies have not experienced the same benefits, and have instead been taking preparations to shore up their financial position during crude's bear market, according to American Banker. Since oil has depreciated sharply, many companies in the oil industry have been responding by proactively cutting their costs, preserving cash and paying down debt, he said.

Amid these developments, analysts asked Wells Fargo how energy prices would affect the organization's financial state, American Banker reported. The company currently derives around 15 percent of its investment banking fee revenue from the oil and gas industry, and 2 percent of its loans are made to this sector.

Thus far, falling crude prices have not compromised loan quality, stated Shrewsberry, according to the news source. However, both he and Stumpf predicted that as U.S. business conditions continue to improve and credit standards ease, loan growth will likely drive greater credit losses.

If this trend spreads across the broader lending industry, the quality of loan portfolios could gradually deteriorate. In addition, while interest rates are historically low, many expect them to trend higher when the Federal Reserve decides to begin hiking its benchmark borrowing costs.

Amid these variables, financial institutions interested in loan sales can greatly increase the odds of fulfilling their investment objectives by contacting Garnet Capital Advisors, a loan sale advisory firm with substantial industry experience involving all types of debt.