By Julie Steinberg
The prolonged slide in oil prices is increasingly scaring bank
investors and worrying analysts, even as executives caution it is
too early to gauge its impact.
The topic has dominated the conversation during the
fourth-quarter earnings blitz for the financial industry,
especially for regional banks that typically lend more to small and
midsize energy-related companies.
On Comerica Inc.'s earnings call last week, roughly
three-quarters of the questions from analysts centered on energy.
Such loans compose about 7% of the bank's portfolio, or $3.5
billion.
In a report Tuesday, analysts at Standard & Poor's said they
are reviewing banks "with large concentrations in energy-related
loans" and said that falling oil prices could result in "negative
rating actions" for those banks. At least two banks say they have
built up reserves to cushion the potential blow from energy
losses.
Meanwhile, regional banks' stocks are taking a hit: Shares are
down more than 20% on average since June 20, 2014--the date of
oil's most recent peak--at 13 banks whose energy loans comprised 5%
or more of the bank's overall loan portfolio during the third
quarter, according to FactSet Research Systems and data provided by
Keefe, Bruyette & Woods.
The list includes banks located in Texas, Oklahoma and
Louisiana.
Investors are "panicking," said Brady Gailey, an analyst with
Keefe, Bruyette & Woods, adding that he and other bank analysts
are increasingly hearing from jittery investors about how much
stock to hang onto.
His view: "It's going to take a while for losses [at the banks]
to flesh out, but it's something we're very concerned about."
Plummeting oil prices hold a special fear for bankers who
remember the mid-1980s, when oil prices dropped more than 50%. In
Texas alone, about 700 banks and thrifts failed between 1986 and
1990. Many bank executives and regulators say a number of measures
have been put in place to protect against such widespread
losses.
Over the past few days, bank executives on earnings calls have
sought to assuage investors about the health of their loan
portfolios.
On Wednesday, Fifth Third Bancorp said it has $2 billion in
energy-related loans that comprise about 2% of the bank's total
loans. Kevin Kabat, chief executive at the Cincinnati, Ohio-based
regional lender, said in an interview that he believes the bank is
"very well positioned."
"While there will be stress within that portfolio, nothing is
overly concerning at this point," he said.
As part of lending agreements, banks often require energy
borrowers to hedge production to guarantee a minimum price for the
oil and gas they produce as a means of ensuring their loans will be
repaid. The vast majority of Fifth Third's energy customers are
hedged through 2015, executives said.
At Dallas-based Comerica, Chief Financial Officer Karen Parkhill
said on an earnings call that while more than 95% of the loans are
secured, Comerica in the fourth quarter increased its reserve
against its energy portfolio by 60 basis points. She said the
bank's customers are "generally well-hedged."
SunTrust Banks Inc., which also reported earnings last week, has
built a reserve of funds within its wholesale banking sector "to
address uncertainty in the energy sector," Chief Financial Officer
Aleem Gillani said last week.
On Tuesday, Regions Financial Corp. said energy-related loans
comprised 4.3% of its total loans outstanding as of Dec. 31, or
$3.4 billion. The Birmingham, Ala., bank said 41% of its clients
were hedged through 2015 and an additional 17% through 2016.
Grayson Hall, the bank's chief executive, said on a call with
analysts Tuesday that Regions isn't "seeing any adverse impacts
yet" in its energy loans and that the bank hadn't felt the need to
set aside a special reserve to cushion that portfolio.
Jonathan Camarda, a wealth manager at Camarda Wealth Advisors, a
firm with about $230 million in assets under management in Fleming
Island, Fla., said he wants regional banking exposure for clients
"to be a minimum" as a result of the depressed oil prices.
He says some clients in recent weeks have sold positions in
Regions. But he said "a greater proportion of clients has stayed
in" so far.
Big banks are also seeking to reassure investors. Citigroup Inc.
and Bank of America Corp. have emphasized that loans to energy
companies make up only a small portion of their commercial credit,
and are confined mostly to large, multinational companies with
solid credit ratings, many of them based in North America or the
U.K.
Bank of America said in filings that about 6% of its
commercial-credit exposure is to energy companies. Citigroup said
that about 11% of its commercial-credit exposure is to
energy-related companies.
At Wells Fargo & Co., Chief Financial Officer John
Shrewsberry said last week on an earnings call that the bank is
examining loans on a "name-by-name basis" as well as their risk
ratings.
J.P. Morgan Chase & Co. last week said it has some minor oil
exposure, but Chief Executive James Dimon on an earnings call said
oil volatility "isn't going to be a big deal" because the bank is
large and diversified.
Joseph Stieven, president of St. Louis-based Stieven Capital
Advisors, which invests in financial institutions, said he has
stepped up conversations with management teams at various banks to
assess how prepared they are for a continued drop in oil
prices.
Mr. Stieven says he is asking about if banks plan to modify
loans for their customers, how diversified their energy lending
portfolios are and what prices they are "stress-testing" oil at in
various scenarios. He has discussed these issues with 10 banks, he
said. Many banks recalculate loans each spring and fall.
Some bank analysts are more sanguine about the resilience of the
industry. "There are likely to be higher oil-related losses, but
the industry is better able to absorb those losses than at any
other time in decades," said CLSA analyst Mike Mayo. "We're not on
the cusp of a big disaster right now," he said.
Christina Rexrode and Emily Glazer contributed to this
article.
Corrections & Amplifications
Regions Financial Chief Executive Grayson Hall said the bank
isn't "seeing any adverse impacts yet" in its energy loans. An
earlier version of this article incorrectly attributed the remarks
to finance chief David Turner.
Write to Julie Steinberg at julie.steinberg@wsj.com
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