Daily News: January 20, 2015

Fitch: U.S. Banks’ Risk in Oil’s Decline Limited, for Now

U.S. banks with higher exposures to the energy sector should withstand the recent declines in energy prices over the near-term, according to Fitch Ratings. The ultimate impact will be driven by the duration and severity of price declines, as well as the lending expertise of the banks. Multiple factors unique to energy-sector borrowers can be key determinants in loan outcomes, including total leverage, geographic focus, location in the oil services chain, price hedging and hydrocarbon mixes.

Fitch sees banks with large energy loan books as having manageable exposures to the energy sector relative to capital positions. Nonetheless, negative rating momentum could occur if nonperforming loans and net charge-offs at these banks approach levels above long-term averages for energy-related lending.

In a scenario where oil prices remain below the assumption in Fitch’s Global Economic Outlook of less than $60 per barrel (using the Brent Index) into second-half 2015, Fitch believes there may be some weakness in loan performance tied to energy and a potential rise in provisions for credit losses. Oil prices have recently fallen below $50 per barrel, but the oil price point that creates losses for producers can vary substantially.

There are key differences relative to the oil price decline in late 2008 through first-half 2009 that raise concerns for Fitch. First, the shale oil boom has increased the number of new borrowers in the energy sector. While established energy lenders may tend to deal with the energy corporations that have managed through prior price declines, some new borrowers are highly leveraged and thus pose greater risks for banks.

Fitch is also concerned that competition for commercial and industrial (C&I) loans has been fierce, including in energy lending, and as a consequence, underwriting standards may have become lax. In second-quarter 2013, for example, oil-related C&I loans grew by 19% year over year relative to second-quarter 2012. More recently, the Semiannual Risk Perspective report published by the Office of the Comptroller of the Currency in fall 2014 showed growth of 8%, which reflected a slowdown in the pace of growth versus previous periods.

Banks that finance local businesses in markets that have benefited from the energy boom are also likely to have correlated sensitivity to the energy sector. Fitch believes these banks will experience a slowdown in loan growth. Nonetheless, Fitch recognizes the positive potential impact to the U.S. economy from the decline in oil prices, which will likely increase household disposable income and could lead to higher GDP.

The capital markets segments of several of the large U.S. banks may also be impacted by the recent decline of energy prices. While oil’s price volatility has some potential to be a boost to trading commissions, other points, such as energy hedge valuation swings, declines in energy-related investments, and execution risks related to loan syndications are likely to be seen over the near term, as market sentiment for energy-related issuances wanes. According to Thomson Reuters League Tables, energy and power industries accounted for $12.45 billion in fees in 2014, attributable to M&A as well as equity, bond and loan underwriting.