... amid a (long-overdue) investor revulsion to the highly levered
energy sector, much of which is funded in the high yield market, as
crashing oil prices bring front and center a doomsday scenario of mass
defaults as shale companies are unable to meet their debt and interest
payment obligations, investor focus is shifting up the funding chain,
and after assessing which shale names are likely to be hit the hardest,
with many filing for bankruptcy if oil remains at or below $30, the next
question is which banks have the most exposure to the energy loans
funding these same E&P companies.
Conveniently, in a note this morning looking at the impact of
plunging interest rates on bank profitability, Morgan Stanley also lays
out the US banks that have the highest exposure to energy in their Q4
loan books.
So without further ado, here are the US banks that stand to suffer the most if a wave of defaults his the shale patch:
Morgan Stanley was diplomatic enough to frame these banks only in the
context of their loan exposure, suggesting (strongly) they would have
to significantly boost their loan loss reserves, adversely impacting the
bottom line:
Crude Oil collapsed 25% to ~$30 per barrel from Friday’s close post
Friday’s OPEC+ meeting which ended without the anticipated production
cut. This puts oil prices at much closer if not below breakeven for many
US shale producers. Regions Financial, for example, underwrites to a stressed barrel of oil of $39.20. We assume that under the new accounting rule for CECL that banks will need to boost reserves for their oil and gas exposures during 1Q20 and 2Q20.
We assume that the banks will increase their loan loss reserves against
their energy portfolios to the levels reached in 1Q16 when oil prices
were running at about $30. This lowers EPS in 1Q and 2Q 20, shown in
Exhibit 19.
Assuming the shale situation is salvageable, Morgan Stanley then lays
out the large and mid-cap banks that have the most loan exposure and
will likely have to boost their reserves to the levels seen during the
Q1 2016 energy crisis:
We pulled energy exposures for the Large Cap and Midcap banks to assess how much the lower oil prices could drive up provisions.
We are using each bank's most recent energy loan disclosure listed
below. We assume that the banks today are holding a 1% reserve ratio
against these exposures. We then looked at how much loan loss reserves
banks held against energy loans in 1Q16,a time when oil prices were
around $30 per barrel. We assume that the banks will need to
increase their loan loss reserves against energy loans back to those
1Q16 levels in 1Q and 2Q this year,assuming oil holds at ~$30.
This increase in loan loss reserves is a bit quicker than prior cycles,
but since we are operating under the new Current Expected Credit Loss
accounting model (CECL), banks will need to reflect life time
losses for their oil exposures at an oil price today that is roughly
half of what it was on December 31,2019 when it ended the year at ~$66
For the largest banks this means billions in incremental energy reserves, subtracting directly from the bottom line....
