Energy Crisis Triggering Brownout in Shared National Credits

Many energy lenders have begun to sour on shared national credits after years of using the hefty loans to bulk up their balance sheets.

The credits — $20 million at a minimum, split among at least three lenders — grew rapidly in the past decade, driven in part by financing for the recent oil boom, and were once very profitable.

But they have taken a destructive toll on many banks' portfolios as the crash in oil markets has made it harder for many commercial borrowers to repay their debts. Regulators have also taken an aggressive stance in shared-national-credit examinations, requiring banks to boost reserves on big oil loans, observers said.

Regional banks had especially relied on them as a go-to source of growth, but lenders like Regions Financial in Birmingham, Ala., have begun to scale back.

"If you have a problem with a shared national credit, typically it's a big problem," said John Turner, head of the corporate bank at Regions.

The $126 billion-asset company has made itself more selective over the past year about which syndicated credits to join in on, whether involving energy or other sectors, Turner said.

When shared loans come up for renewal — about every four years — Regions as a general rule is only signing on again if it has a relationship with the borrower, such as a deposit account. That is not only a good risk management practice, but it maximizes returns on precious capital, the company says.

"Credit-only relationships aren't particularly profitable or sustainable," Turner said.

The new approach to shared credits is expected to hamper Regions' loan growth in the coming year. During the first quarter, loans grew 5% from a year earlier. For the remainder of 2016, Regions expects to expand its book by about 3%.

"To some extent Regions has the capacity to grow loans elsewhere," said Chris Marinac, an analyst with FIG Partners, adding that it might take time. "They don't need to use SNCs as a crutch, for lack of a better word."

Other Gulf Coast lenders, including Comerica in Dallas and Iberiabank in Lafayette, La., have announced plans to shrink their energy books. Doing so will likely involve a reduction in shared credits, Marinac said.

A spokesman for Comerica, when asked about its plans, said only that the credits are an "appropriate tool" for serving larger customers. Iberia did not immediately respond to a request for comment.

The overall pullback, which is hard to put exact numbers on yet, has the makings of a major change of course.

SNCs have boomed for years. In 2015 alone shared-national-credit commitments grew 15% from a year earlier to $3.9 trillion. Most of the credits were held by banks, though nonbanks — such as hedge funds and insurance companies — accounted for nearly a quarter of the exposure.

If more regional banks pull back from shared credits, nonbanks could increase their market share, according to Marinac.

Shared credits are big business for commercial lenders.

At Fifth Third Bancorp in Cincinnati, for instance, the credits make up about half of the $141 billion-asset company's commercial loan book, executives said on a January conference call.

Large concentrations of shared credits are also par for the course for energy lenders, which provide financing to capital-intensive firms.

At the $69 billion-asset Comerica, for instance, about 95% of the company's energy book is in shared credits, according to a February regulatory filing. Energy loans made up 6% of total loans as of March 31.

Other energy lenders have lower concentrations in their oil books than Comerica's, but they are still sizable figures.

At the Japanese-owned MUFG Union Bank in San Francisco, shared credits account for 75% of oil and gas loans, according to a February regulatory filing.

At BOK Financial, shared national credits accounted for 54% of the company's energy book as of March 31. Notably, the Tulsa, Okla., company says that for years it has only participated in shared credits if it has a separate business relationship with the borrower.

"We evaluate a shared national credit just like we do a typical loan," said Stacy Kymes, executive vice president of corporate banking at the $31 billion-asset BOK.

For Regions, scaling back on shared credits will ease the reserving and loan-categorization headaches that accompany these more complex loans, Marinac said.

In the past year, the federal agencies that conduct shared-national-credit exams — the Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency — have taken a more stringent approach on risk ratings for oil and gas loans.

In an examination this spring, regulators were said to have pushed banks to shift some performing oil loans to "criticized" status. That led to a spike in loan-loss provisions across the industry during the first quarter.

"Just like a traffic cop, you can't debate these things with a regulator," Marinac said.

The aggressive provisioning has made big oil loans less profitable for some banks. "I think what happens is it fails the risk-adjusted test," Marinac said.

Scaling back on the loans will allow Regions to avoid the sometimes hairy, interbank conflicts that arise when big borrowers run into trouble repaying their loans, according to Turner.

In some cases, the credits are split among more than 10 big banks.

Typically banks agree among themselves on how to satisfy the terms of a loan covenant, but "any number of things" can trigger a vote among the creditors, according to Alan Avery, a partner in the financial institutions group at Latham & Watkins.

"If you develop a problem — and it's a big problem — think about trying to work it out with all of the banks in the group," Turner said.

Still, not all regional banks are scaling back.

BOK, for instance, has no plans to change its strategy toward using shared credits in the hard-hit energy sector.

"We do not have any plans to reduce our exposure to this space," Kymes said.

PNC Financial Services Group in Pittsburgh is upbeat about shared credits overall, according to a spokesman for the $351 billion-asset company.

"We see new opportunity in this space, and we are 100% committed to serving our clients, regardless of size," the spokesman said.