In yet another sign that lower-for-longer commodity price sentiment has taken hold of the market, Standard & Poor’s Ratings Services (S&P) said Tuesday it downgraded four U.S. regional banks because of their large energy loan portfolios.
Ratings were cut for BOK Financial, Comerica, Cullen/Frost Bankers and Texas Capital Bancshares, and S&P revised its outlook on BBVA Compass Bancshares to “negative” from “stable.”
“The negative outlooks on these banks reflect our concern that the downturn in oil and natural gas could be long-lasting, and therefore ultimate loan losses within the banks’ energy loan portfolios could meaningfully worsen,” S&P analysts wrote. “In addition, we think indirect exposures in energy-dependent geographies could also pressure loan performance.”
In 4Q2015, several regional banks with significant energy loans reported increases in loan loss provisions, energy loss reserves and “in certain cases,” nonperforming assets also rose.
“Given further declines in energy prices in recent months, less hedging activity by borrowers, and potentially more difficulty for borrowers” to resolve “borrowing base deficiencies through capital raises or asset sales, we think troubled debt restructurings and NPAs in the energy sector will increase, possibly sharply, in the coming quarters,” analysts said. Financial regulators could also pay closer attention to energy loans in 2016, the agency said, encouraging “the use of higher loss assumptions.”
Many banks lowered their price assumptions for exploration and production (E&P) loans in 2015, which reduced the producers’ borrowing bases. Those borrowing bases are likely to “decline further” because of “lower energy prices...and possibly lower reserve replacement, which could lead to more borrower deficiencies” where loans are valued higher than the borrowing base, S&P said.
Even though banks typically allow borrowers six months to resolve deficiencies, there may be less flexibility to do so in 2016, according to S&P, which expects fewer options available through “debt capital issuances and asset sales and dispositions, which were more common last year.
“Specifically, the cost of capital has increased for many borrowers, and private equity firms may be less willing to commit additional capital to resolve deficiencies. In addition, E&P borrowers may have unsecured debt” along with “their reserve-based loans, which could pressure their overall finances and push them into default or bankruptcy.”
Still, the outlook may not be all doom-and-gloom for energy sector borrowers in 2016.
Executives with JPMorgan Chase & Co. told analysts during a 4Q2015 earnings call last month that they would continue to support their energy sector clients (see Daily GPI, Jan. 15). The bank said it could set aside $750 million in reserves in the event oil stays around $30/bbl over the next 18 months, with CEO Jamie Dimon saying he would “put up more if I could.”
Meanwhile, Fitch Ratings said in late December that the collapse in oil prices had resulted in only “relatively light” reductions in access to capital for high-yield E&Ps (see Shale Daily, Dec. 21, 2015).