January 28, 2016 - 10:57 AM EST
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Fitch: Fallout from Oil Prices Emerging for US Banks

Link to Fitch Ratings' Report: U.S. Banking Quarterly Comment: 4Q15
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=876982

The 4Q15 results for US banks showed generally lower net income affected by market volatility, interest rate uncertainty and pressures in oil & gas (O&G), according to Fitch Ratings. Incremental spread income growth, still very benign credit costs and moderation in large litigation-related builds (excluding Goldman Sachs) offset these trends.

Results for the largest 17 U.S. banks were generally lower on a linked-quarter basis, with 11 reporting decreased net income sequentially. Given the prolonged low interest rate environment and relatively weak economic trends, absolute earnings remain relatively lackluster, with a return on assets, on average, of less than 100 bps, well below pre-financial crisis levels.

Following the precipitous drop in oil prices last year that has accelerated into the new year, many of the banks reported further loan loss reserve builds. Exposure to oilfield services companies and exploration and production companies were cited as higher risk segments for the banks. While direct exposure to O&G for the large banks (included in our quarterly comment) is fairly modest, the related provisioning still affected reported results, which have benefited greatly from reserve releases over the past few years.

Fitch now expects oil prices to increase to $45 on average in 2016 and $55 in 2017, which marks a large improvement from current prices of around $30 a barrel. We expect some price recovery in the second half of this year as the market nears balance.

Regulatory uncertainty regarding oil prices remains for the banking sector. The next Shared National Credit review, which assesses risk in the largest and most complex credits shared by multiple financial institutions, will likely again focus on O&G exposure as well as leveraged lending. The review will begin on Feb. 1 utilizing data as of Sept. 30, 2015. The results will likely prompt further downgrades in banks' energy portfolios since the Spring 2016 redeterminations on borrowing bases will likely prove more challenging than the recently completed Fall 2015 process.

Future challenges include hedging protection is rolling off at O&G companies, capital markets availability is diminishing and their ability to cut capex further may be constrained. How the regulators will layer in the recent price declines is unclear, as well as how this will factor into the annual regulatory stress testing.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Related Research

U.S. Banking Quarterly Comment: 1Q15 (Low Rate Environment Takes its Toll on Regionals)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865281

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Source: Business Wire (January 28, 2016 - 10:57 AM EST)

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