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More pain seen ahead for U.S. banks exposed to energy loans
January 14, 2016 / 2:50 AM / 2 years ago

More pain seen ahead for U.S. banks exposed to energy loans

(Reuters) - U.S. banks exposed to energy-related loans will need to set aside even more money than previously expected to cover potential losses as oil prices near 12-year lows.

Earlier on Wednesday, BOK Financial Corp became the third U.S. bank over the past month to increase its cushion for energy loans, and analysts said there was more to come as earnings season kicks off this week.

“It’s going to get worse before it gets better,” said Michael Rose, an analyst at financial services firm Raymond James Financial Inc.

BOK, which primarily operates in Oklahoma and Texas, expects loan loss provisions for the fourth quarter to increase to $22.5 million, nearly four-times the midpoint of the $3.5 million to $8.5 million it forecast earlier.

Associated Banc-Corp said Jan. 8 it would set aside an additional $13 million for bad loans, while Hancock Holding Co upped its allowance by $42 million Dec. 17.

For the largest U.S. banks such as JPMorgan Chase & Co which reports earnings on Thursday, and Wells Fargo & Co which reports Friday, energy-related exposure is in the low single digits as a percentage of total loans. Still, analysts and investors will be listening closely to what these banks have to say about the energy sector.

Meanwhile, some regional banks have much more concentrated exposure. Energy loans at BOK Financial, for example, account for 18 percent of the total portfolio.

Raymond James analyst Rose ultimately sees value in several banks heavily exposed to energy as he said loans to the industry are more conservatively underwritten than other types of loans. He said he is more concerned about commercial and residential real estate loans made in communities where many jobs are tied to the energy sector than he is about the energy loans themselves. Even so, Rose said regional banks with heavy energy exposure will weather the downturn.

“I think we’re setting up for a tremendous buying opportunity in a lot of these names because these banks are not going to lose money,” he said.

Raymond James energy analysts are forecasting oil prices at $60 by year-end. However, analysts at Goldman Sachs, have said oil could fall to $20 a barrel. Oil prices are currently at roughly $30 per barrel.

The extended downturn for oil has market watchers paying ever closer attention to banks that lend to energy companies.

“Everybody was hoping for a bounce through most of last year and it hasn’t materialized so I think both the regulators and the auditors are going to be taking a much harder look at these credits,” said Christopher Whalen, credit analyst at Kroll Bond Rating Agency.

Analysts at Barclays Capital stated in a note published Wednesday that mid-sized banks they are most concerned about near term are Cullen/Frost Bankers Inc and Texas Capital Bancshares Inc.

“We think their energy reserves are comparatively low necessitating fairly material builds over the next few quarters,” the note stated. Calls placed late Wednesday to representatives at Cullen/Frost and Texas Capital were not returned.

Reporting by Dan Freed in New York; Additional reporting by Sudarshan Varadhan in Bengaluru; Editing by Sriraj Kalluvila, Diane Craft and Lisa Shumaker

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