Moody’s warns of US banks’ energy loan exposure

OREANDA-NEWS. July 22, 2015.  US banks with high energy-sector loans may have to earmark more funds to provide for losses against the lending in case of a prolonged slump in oil prices, according to Moody's Investors Service.

Moody's identified BOK Financial, Hancock Holding, Cullen/Frost Bankers, Texas Capital Bancshares, Zions Bancorporation, Comerica and BBVA Compass as the banks with the most outstanding energy loans versus common equity. Wells Fargo and JPMorgan Chase in their second-quarter earnings calls already flagged that they have experienced asset quality deterioration in their energy loan portfolios, Moody's said.

As a percentage of common equity, energy loans were the highest for BOK Financial, at 102pc, followed by Hancock Holding at 99pc and 96pc for Cullen/Frost Bankers. Comerica and BBVA Compass were the lowest in the list, with both at 53pc.

"The major risk for these banks is a prolonged slump in oil prices, which would weaken the energy companies' ability to offset diminished cash flow with expense cuts," it said. "The problem worsens the longer the prices remain depressed, leading to higher provisions for the banks."

US shale producers, who have historically outspend income by taking on debt on the back of a strong market, are fast running out of options to raise cash to service their borrowings. They have already raised billions of dollars by selling equity at levels not seen since at least 2009. Many have sold non-core assets and have cut spending plans to focus only on areas that offer the best returns. Smaller producers like, Saratoga Resources, Quicksilver Resources, Dune Energy and American Eagle Energy, have filed for Chapter 11 bankruptcy protection.

Yet, Moody's said that based on its own forecast for oil prices, the banks may not have "to make appreciably higher loan-loss provisions in the coming quarters."

Moody's expects oil prices to rise to \\$60/bl in 2016 and \\$65/bl in 2017. Higher shipments from Iran following a nuclear deal with world powers may, however, temper its 2016 oil price forecast by \\$5/bl.

US crude futures may slide further through the third quarter before starting a recovery toward the end of the year, as seasonal refinery maintenance worsens an oil oversupply in a market already pressured by a strong dollar.

Crude dipped below \\$50/bl in intraday trading yesterday and today, its lowest level in three months. A close below \\$50/bl may mean a move toward targets near \\$46.40/bl, according to a technical analysis by UK-bank Barclays. US bank Goldman Sachs had earlier this month forecast October WTI declining to \\$45/bl.