BAC Bank of America Corporation

It took a huge slump in the energy industry to make it happen, but big banks are finally adding to their rainy-day funds again.

The big national banks added a total of $777 million to their reserves for soured loans in the first quarter. That is up from the $296 million they added in the fourth quarter of 2015 and marks a sharp break with the years before that. Before late 2015, the banks had released funds from their reserves every quarter since 2009—$795 million in releases in last year's first quarter, for instance.

Three of the big four national banks—J.P. Morgan Chase & Co., Citigroup Inc. and Wells Fargo & Co.—indicated they had built up their reserves in the first quarter. Only Bank of America Corp. still released reserves, and it released only $71 million during the quarter, its smallest quarterly release in its six years of doing so.

Banks "build" loan-loss reserves when they add new provisions to their reserves for soured loans to a greater extent than they write off bad loans as uncollectable, freeing up the reserves associated with them. A "release" is the opposite—charge-offs outweigh new provisions.

The new reserve builds are driven largely by worsening credit conditions among energy-industry borrowers that are prompting the banks to set aside more reserves to guard against oil and gas loans going bad. The energy problems outweighed continued improvements in credit quality among other types of loans like home mortgages that otherwise would have prompted the banks to continue releasing reserves.

J.P. Morgan, for instance, added $529 million to its wholesale reserves in the first quarter because of oil and gas loans. Wells Fargo said its loan-loss allowance for its oil and gas portfolio increased by $504 million during the quarter.

More reserve builds are possible in the quarters to come, the banks said, especially if oil prices remain low. "My assumption is that we're going to be talking about this all year," said John Shrewsberry, Wells Fargo's chief financial officer, on the bank's earnings conference call Thursday. He said he feels "great" about Wells' reserves, "but I'd be hesitant to tell you that this was the big quarter."

Before the fourth quarter of 2015, the four-bank group had released reserves for 23 straight quarters—a total of about $85 billion in releases that flowed directly into the banks' earnings, boosting their profitability in an era when they struggled to generate profits from their core operations. The impact on profits has been more muted in the last few years, but even in 2015, reserve releases contributed $2.2 billion to the four banks' earnings.

The first-quarter reserve builds cut into the banks' profits, albeit in a minor way: The $777 million build for the four banks is only 3% of their total pretax income for the quarter.

Even with the recent reserve builds, reserves are still at a very low level after six years of releases. Industrywide, banks' reserves were only 1.34% of total loans and leases at the end of 2015, according to the Federal Deposit Insurance Corp., the lowest level since 2007.

Write to Michael Rapoport at Michael.Rapoport@wsj.com

(END) Dow Jones Newswires

April 15, 2016 15:45 ET (19:45 GMT)

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