Troubled loans to oil and gas companies at Dallas-based Comerica have reached their highest point in nearly two years, and executives warned Tuesday that future energy lending could be constrained.
The $73.1 billion-asset bank, the largest based in Texas, reported $366 million in criticized energy loans at year-end, a 76% increase from a year before and a 66% spike from Sept. 30.
Prices for West Texas Intermediate crude have declined 22% since June 2018. Low prices for new production have hurt borrowers still struggling to overcome the effects of the last energy downturn five years ago, and the situation could complicate efforts by Comerica and its rivals to jump-start commercial loan growth.
“Our appetite is that we are still looking for opportunities, but I would say they're more limited in this environment that we're in,” Peter Sefzik, Comerica’s executive director of business banking, said on a call with analysts Tuesday. “We're not seeing a whole lot of deal flow. You're seeing consolidation in the space, not a lot of capital coming into it, but we're continuing to be a very important energy lender in the space.”
The bank reported a 13% year-over-year decline in net income for the fourth quarter to $269 million. Earnings per share of $1.85 beat the $1.75 mean estimate from analysts tracked by FactSheet Research Systems. But analysts at B. Riley FBR said in a note Tuesday that the 2020 “outlook remains challenging” for the bank.
Comerica stock had declined 3% in late-afternoon trading Tuesday.
The bank forecast lower net interest income for the year — it did not say how much lower — and an increase of as much as 3% in expenses as it continues to invest in new technology. B. Riley FBR analysts estimate Comerica’s net interest income, which is responsible for about 70% of the bank’s revenue, could drop by as much 10% over the next year while its cost of credit could climb 78%.
The bank in the fourth quarter set aside $74 million in provisions for credit losses over 2019 due mostly to problems in the energy market; it reported a reserve release of about $1 million a year earlier.
Specifically, private investors have pulled out of the sector, which has led to a decline in the value for land and equipment that banks would take back in case an oil and gas borrower defaults. This has forced Comerica to add to its reserves when it marks down the value of these assets.
Energy loans accounted for about 90% of Comerica’s $21 million in net charge-offs in the fourth quarter. Comerica executives said on the call Tuesday they were “hopeful” that charge-offs in the bank’s energy book could slow in 2020.
But the B. Riley FBR analysts noted that an expectation of fewer energy loan charge-offs “seems somewhat optimistic” given the sharp uptick in criticized energy loans over the previous year.
