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First Guaranty Bancshares in Hammond, La., has postponed its initial public offering, citing "unfavorable market conditions."
December 19 -
The price of crude oil has fallen 25% in four months, but banks most closely tied to the energy industry aren't worried. They say risk-mitigation strategies make a bust unlikely, and it would take a severe and prolonged slump to hurt credit quality.
October 23
Commodities analysts' predictions of oil hitting $50 per barrel in 2015 reverberated on the stock exchanges this week, sending to one-year lows shares in Cullen/Frost Bankers and BOK Financial, two of the most exposed lenders in the sector.
In commodities this week, West Texas Intermediate crude oil and Brent crude hit their lowest levels since May 2009, with WTI closing Thursday at $54.11 and Brent finishing at $59.27. Brent will next year slide to $50 per barrel, according to seventeen analysts polled in a Bloomberg
Shares of Cullen/Frost in San Antonio and BOK in Tulsa, Okla., continued to dive on the release of those forecasts, falling 16.17% and 13.56%, respectively, in the month-long period ended Thursday. Each had risen less than 1% late in the trading day Friday.
Cullen/Frost Chief Executive Dick Evans appeared multiple times in television interviews this month, again and again calling for caution. "We are not in a panic," he said. Oil was $65 per barrel at the time of those interviews.
A deeper price slide may not only stress bank credits but will have direct regional impact on the workers and consumers who have enjoyed several years of booming energy growth in the Texas and central U.S.
Texas home prices, for example, may be the most overvalued in the country, even surpassing California, according to Fitch Ratings, which on Friday reported 11% overvaluation across Texas. Home prices in Austin, Dallas and Houston each grew more than 20% since 2011. The most exposed economy in Texas to slower economic growth is Houston. Nearly 10% of Texas' economy is driven directly by oil. Nationally, that figure is only 2%.
Oil at $50 per barrel may trigger energy loan losses and adversely impact next year's earnings, Fitch said earlier this month. "For a few producers, the current $67 per barrel of West Texas Intermediate crude oil could already represent a market condition that is below breakeven." Oil will have to recover above $70 per barrel in order to avoid serious credit impacts to lenders' energy loan portfolios, they said.
Other credit analysts, such as those at Kroll Bond Rating Agency, note the impact on banks' leveraged lending. Citing the oil price collapse of the 1970s, Kroll warned that exposed banks, insurers and bond investors in leveraged loans should seriously consider repayment rights in the event that a lead bank or sponsor fails.
Among the largest U.S. banks, investors have already seen a few problems among
The extent of those losses would be calculated by where on the balance sheet each bank booked the loan. If Wells and Barclays choose to sell the loan to investors, the loan will need to be marked to market, and investors could buy it for less than the loan's value under certain market conditions. Wells could be looking at an estimated 40-cent loss on the dollar for the market value, according to Chris Mutascio at Keefe Bruyette & Woods.
Alternatively, if Wells and Barclays do not sell the loan, and it is transferred into a held-for-investment account, the loan is only marked one time. If that is the case, the question then is: at what time was the loan moved, and, at that time, what was the price of oil? If Wells and Barclays move the loan into the held-for-investment portfolio, and the collateral value is still substantially below the loan amount, then they may need to take a reserve against the loan. And in some cases, as was the case with the mortgage crisis, the marked-to-market impact can be much greater than whatever losses may occur.
Officials and spokespeople at Wells and Barclays declined to comment, and they would not provide any information regarding the loan's status.
Investors, meanwhile, have piled into even more credit default swaps to hedge against Forest Oil, which has attracted bearish bets from debt owners who also dislike the merger that their boards approved on Tuesday. A five-year credit default swap on Forest Oil is now consistently ranked one of the most active CDS in Bloomberg market data.
Since OPEC's Nov. 27 refusal to shore up oil prices, the cost to protect Forest Oil debt has soared by 258%, Markit data show. Those derivatives are 678% more expensive than they cost Jan. 1, 2014. No fewer than three other oil companies
In the oil-producing regions of the country, nine banks across Louisiana, North Dakota, Oklahoma and Texas have ratios of construction loans measured against their Tier 1 capital of more than 100%. (Independent energy companies often take out these types of loans.) The top of the list, as compiled by FIG Partners data, includes: Affiliated Bank (304%), Central Bank (168%), Florida Parishes Bank (141%), Texas Capital Bank (130%) and International Bank of Commerce (129%).
Cullen/Frost (51%) and BOK (40%) sit in the bottom tier of the list. But in terms of outstanding loans directly related to energy production, these two lenders have the highest concentrations, at 15% and 19% each, as of Sept. 30.
BOK (the parent of Bank of Oklahoma) conducts stress tests on its oil portfolios using oil prices down to $55, but that's as low as it gets, KBW bank analyst Brady Gailey said. At that level, the company faces minimal loss exposure, but it would likely face extended loan repayments, he said.
Gailey said oil would have to stay between $60-$65 per barrel for a year in order to harm most banks' earnings.
"Even with oil at $70 bucks a barrel, there is still money to be made in Texas," he said in an interview two weeks ago. "These banks will have to change their underwriting with a more conservative price of oil."
Not everyone believes banks will move aggressively on their riskiest but valued customers. "Banks may sit and wait it out before they take any actions to strengthen those credits," said Scott Siefers, an analyst at Sandler O'Neill. "The fear, however, is if the price of oil causes borrowers to break covenants."
Others appear to have taken precautions in their disclosures to investors. Iberiabank Corp. in Lafayette, La., included in its last 10-Q a warning that a prolonged decline in commodity prices could adversely affect the industry and the company's earnings. At the time, oil was $78 per barrel.
