Bank Risk to Energy Loans – Is it really a big deal??

By ,   March 11, 2016

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Oil prices continue to be depressed due to increased global supply and record high inventory levels in the U.S.  The glut has pressured energy producers, especially higher cost shale oil producers.  These companies have done a number of cost cutting measures to circle the wagons and find a way to adjust to the new environment.  Further, with Iran bringing on new supply, and limited cooperation among global producers, it looks likely these lower oil prices will persist.

Given this “lower for longer” scenario, investors have started questioning not only the viability of the energy producers themselves, but the concern is spilling over into the banking sector.  How exposed are the banks to these producers?  If they go bankrupt, how bad will it hurt the banks?  The speculation has pressured banks stocks recently, but I would say the decline presents an opportunity.

This chart details bank exposure to energy loans.  While some of the larger banks hold a relatively large dollar value of loans, the actually % exposure to their total loan portfolio suggest a different story.  For example, Bank of America holds $21 Billion in Energy Loans; however, these loans ONLY constitute 2% of their Total Loan portfolio.  Now of the that 2%, not all of those companies are likely to default.  And for the ones who may actually get in trouble, I would speculate some sort of negotiation of the terms given the geopolitics involved in the situation.  Lastly, banks, in general, are in much better financial position due to the new regulations and requirements following the housing market crash, so systematic risks should be limited.

The banks who are more at risk are more Texas-focused.  Specifically, some banks have emphasized supplying credit to energy companies, and these loans thereby comprise a much larger portion of their loan portfolio.  But I think it is unfair to punish the banking industry as a whole when risks seem to be more localized.  Therefore, I look at the recent pullback as an opportunity.

Bank Loans in Energy

Sources:  Bloomberg