Yahoo Finance Energy-exposed banks attempt to bounce back after second punch from oil prices
Monday’s brutal sell-off hammered the banking industry as bond market volatility sent rates crashing, but banks with high energy exposure endured a double whammy from the oil war triggered by OPEC on Sunday.
Some energy-exposed regional banks, such as Houston-based Cadence Bancorporation (CADE), lost over 30% at market close on Monday while Oklahoma City-based Bank7 Corp. (BSVN) lost over 25%.
In the first few minutes of trading on Tuesday morning, banks were riding the broader market in recovering some of those losses. The KBW Nasdaq Bank Index (^BKX) gained over 6% as shares of Cadence jumped over 10% and shares of Bank7 surged over 11%. Stocks across the board pared those gains in the late morning.
Still, KBW analysts wrote Monday that the collapse in oil prices to levels around $33-a-barrel are “worrisome” for banks with substantial business ties to oil and gas companies. The concern: that lower prices will crunch margins at companies borrowing from those banks, thus worsening credit quality.
“The depressed energy pricing will be problematic, in our opinion, for those banks with legacy problem energy loans,” KBW analysts Brady Gailey and Wood Lay noted. They flagged Texas Capital (TCBI), Independent Bank Group (IBTX), Hancock Whitney (HWC), and Cadence as examples.
On Sunday, crude oil prices fell by more than 30% after Saudi Arabia slashed prices after negotiations on supply fell through among OPEC nations and Russia.
KBW added that even for banks with stronger credit quality, the pipeline for energy loans will likely weaken the longer the oil standoff continues.
“Overall, we view energy as a near-term risk at this level and are cautious on those exposed,” Gailey and Wood wrote.
According to KBW, Bank of Oklahoma has the highest percentage of its total loans tied to the oil and gas industries, at 18.1%. Bank7 and Cadence follow after, at 14.6% and 11.0%, respectively.
Big banks
Over the last two weeks, the banking industry was already facing pressure as the coronavirus fears depressed U.S. rates.
As the 10-year and 30-year Treasuries repeatedly broke through new records for all-time lows, the banking industry saw sell-offs as investors worried about bank profitability in a low interest-rate environment.
Monday’s price action extended those losses for the big banks in particular, as JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) all notched 30% declines over the two-week period.
Although the large banks have large energy exposure by volume, the scale of their balance sheets make their exposure relatively small. According to S&P Global Market Intelligence, JPMorgan Chase had $44 billion of energy loans on its books as of the third quarter of last year, compared to Bank of Oklahoma’s $4.11 billion of loans.
But as a percentage of total loans, that figure makes up only 5% of JPMorgan Chase’s net loans. For comparison, Bank of America’s energy exposure is 2% and Wells Fargo’s is 1%.
For the big banks, the more pressing question concerns the uncertainty created by the combination of two macroeconomic shocks: the coronavirus and the crashing prices of oil.
On Monday afternoon, the country’s top banking regulators issued a notice encouraging financial institutions to work with borrowers and customers in communities impacted by the spread of the virus. The notice said bank examiners would try to “minimize disruption and burden” while banks work through operational disruptions related to the virus.
Meanwhile, top Wall Street executives, including JPMorgan Chase’s co-president and chief operating officer Gordon Smith, are scheduled to meet Wednesday at the White House to discuss possible responses to the coronavirus.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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