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U.S. Large-Cap & Mid-Cap Banks Drilling into Energy Exposure The upcoming spring redetermi nation period

U.S. Large-Cap & Mid-Cap Banks

Drilling into Energy Exposure

The upcoming spring redetermination period for High-Yield exploration & production (E&P) credits should be an important data point for bank investors. Our HY credit analysts estimate that E&P borrowing bases could decline by 20-30%. This poses an interesting dilemma for HY E&Ps – do they sit and watch their borrowing capacities shrink in hopes of maintaining constructive relationships with bank lenders or do they fully draw down on revolvers at the risk of being pushed into bankruptcy. This report digs deeper into banks’ energy lending exposure, examines the potential impact of a stressed oil price scenario from the perspective of bank equity and bond holders, assesses the adequacy of banks’ existing energy reserves (including historical perspective), and reviews the lateral implications (impacts on CRE, capital markets, rates, and bank lending) from the continued pressure on oil prices.

Equity Research View: Earnings headwinds, not capital concerns

The steep decline in oil prices negatively impacts the oil & gas extraction industry and the quality of loans banks make to the area. We expect 1H16 results to be challenged by the over 25% quarter-to-date decline in oil prices, the March/April redetermination period, the shift in the Shared National Credit exam to twice a year, E&P companies’ hedges rolling off, and banks receiving year-end results from oil field services (OFS) firms. These factors are likely to drive continued energy reserve builds. However, we think the higher provisions will be manageable within the context of our coverage’s earnings capacity (~$50bn in quarterly PPNR).

Credit Research View: Stress Testing Energy Exposure

Cross Asset Research

12 February 2016

INDUSTRY UPDATE

Equity Research: U.S. Large-Cap Banks

Jason M. Goldberg, CFA

1.212.526.8580

jason.goldberg@barclays.com

BCI, US

Equity Research: U.S. Mid-Cap Banks

Matthew J. Keating, CFA

1.212.526.8572

matthew.keating@barclays.com

BCI, US

Jason M. Goldberg, CFA

1.212.526.8580

jason.goldberg@barclays.com

BCI, US

High Grade Credit Research

Brian Monteleone *

+1 212 412 5184

brian.monteleone@barclays.com

BCI, US

Daniel Lang *

+1 212 526 1424

daniel.lang@barclays.com

BCI, US

The six largest U.S. banks have $80bn of funded and $130bn of unfunded exposure to the energy sector. The lack of more granular disclosure leaves many investors concerned about potential downside beyond management guidance. We use the disclosure available from the banks and supplement it with a study of publicly available information on bank lines and revolvers to analyze potential losses under two downside scenarios. If oil is in the $30-35/bbl range for the next three years, we estimate that these banks would face $17bn of credit losses. After allowing for existing reserves, this represents just 5% of consensus pre-tax earnings over the next two years, or 1% of CET1 capital. Under a more severe scenario, in which oil falls to $20/bbl, we believe significant losses could extend into IG exposure, resulting in more than $60bn of credit losses. Even in this extreme case, losses represent just 20% of consensus pre-tax earnings, or 4% of CET1 capital. Thus, although losses could be worse than management forecasts, we believe even in an extreme scenario they would be manageable for credit investors.

*This author is a member of the Fixed Income, Currencies and Commodities Research department and is not an equity research analyst.

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

FOR ANALYST CERTIFICATION(S) PLEASE SEE PAGE 32.

FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 32.

Barclays | U.S. Large-Cap & Mid-Cap Banks

EQUITY RESEARCH

Oil Price Pressure Persists

U.S. Large-Cap & Mid-Cap Banks Jason M. Goldberg, CFA

1.212.526.8580

jason.goldberg@barclays.com BCI, US

Matthew J. Keating, CFA

1.212.526.8572

matthew.keating@barclays.com BCI, US

Results for our banking coverage were generally in-line with expectations in 4Q15, with solid loan growth, modest net interest margin expansion, higher fee income, improved efficiency ratios, lower non-performing assets, net charge-offs that outperformed historical seasonal increases, and continued share repurchase. Still, against this backdrop, most banks only met consensus EPS expectations, as loan loss provisions rose. While an increase was expected, and provisions remain below historical levels, the magnitude of the growth was greater than anticipated. The main culprit was an increase in energy and energy- related loan loss reserves amid growth in criticized and classified assets to the sector. Concerns that higher-than-expected energy-related loan loss provisions will persist coupled with the view that forecasts for GDP growth, capital market-related revenues, higher U.S. short-term interest rates and stabilizing oil prices are all overly optimistic, have sent the BKX index down 23% since the start of the year (significantly lagging the S&P 500’s 11% decline).

The steep decline in oil prices has had a significant negative impact on the oil and gas extraction industry (exploration and production companies, drilling companies, and service companies) and the quality of oil and gas production portfolios across our Large-Cap and Mid-Cap Bank coverage. The drop in oil prices has impaired some energy companies’ ability to pay interest and principal, and has led to some defaults. In addition, companies have incurred significant debt to fund drilling programs, and their capital structures can become unsustainable in the face of lower oil prices. Although many companies have hedged against price declines, this revenue is non-recurring and will run-off, thus potentially affecting future operating cash flows and long-term loan serviceability. As a result, companies are preserving liquidity by deferring development drilling, cutting general and administrative expenses through layoffs to pay down reserve-based lines and increase borrowing availability. Banks have shown flexibility in working with borrowers by relaxing leverage covenants and allowing customers time to curtail borrowing base over-advances. We believe bank regulators have historically been supportive of these actions, though more recently could be pressuring banks to use more conservative price decks.

Nevertheless, in 2H15, we witnessed a significant increase in criticized and classified energy/energy-related loans, while nonperforming loans increased at a modest clip (several noted a portion of NPAs were nonaccruing loans that were current as to principal and interest) and net charge-offs were slight. The increase in classified energy-related credits primarily reflected deterioration in the financial condition of oilfield services companies and exploration and production (E&P) companies, which appear to be the higher risk segments for the banks. This caused banks to build energy loan loss reserves particularly in 2H15. Looking out, we expect results in 1H16 to be further challenged by the over 25% quarter- to-date decline in oil prices, the March/April redetermination period, the shift in the Shared National Credit (SNC) exam to twice a year (we believe the new review period began Feb 1), and as banks see year-end results from the oilfield services companies.

The lower oil prices go and the longer they stay there, the greater the pressure on bank results. Energy loan balances declined in 4Q15 driven by pay-downs tied to capital markets and private equity activity, combined with less drilling activity. Further energy loan balance attrition is likely. Still, most banks view their energy exposures as manageable and look for their energy-related reserve builds to moderate post 1Q16, assuming oil prices stabilize. Given its relatively modest contribution to most banks’ overall loan portfolio, we view our covered banks’ energy exposure as an earnings headwind as opposed to a capital concern.

Barclays | U.S. Large-Cap & Mid-Cap Banks

All else equal, we expect our bank coverage to remain profitable throughout a prolonged low oil price environment.

The direct exposure of large banks to oil and gas loans is fairly modest, but higher provisions do weigh on results, particularly since the past several years benefited from loan loss reserve releases. For some of the more regional players, lending exposure to E&P and services companies is higher. Among the regional banks we cover, CFR (15% of total loans), CMA (7.5%), TCBI (7%), ASBC (4%), and RF (3%) rank the highest in terms of energy loans as a percent of total loans, while E&P and OFS loans as percent of TCE places CFR (74%), TCBI (69%), ASB (41%), and CMA (37%) on top. We are also monitoring several lateral implications, both positive and negative, from reduced oil prices. Regional economies like Texas, North Dakota, Pennsylvania, Louisiana, Colorado, Wyoming, and Oklahoma could be adversely impacted (CFR and TCBI are most exposed here), while reduced oil prices appear to be having an impact on the path of interest rates and the capital markets activities. In addition, commercial real estate is another area that bears watching. Still, we estimate lower oil prices can save the average household ~$1,000 per year relative to a couple of years back, allowing it to better manage its debt.

Direct Energy Lending Detailed

As shown in Figure 2, energy loans represent around 2% of loans at our median covered bank (note, the table includes a few banks outside our coverage). We estimate roughly 40% of this exposure is E&P and 20% is oilfield services. Almost 30% of energy credits were criticized at year-end, up from virtually nothing six quarters ago. The median energy reserve is 5% of energy loans, a level we expect to increase further in 1Q16. Unfunded commitments are almost equal to funded energy commitments, though banks have safeguards in place. Among the regional banks we cover, CFR (15% of total loans), CMA (7.5%), TCBI (7%), ASBC (4%), and RF (3%) rank the highest in terms of energy loans as a percent of total loans. Looking at E&P loans and oilfield services loans as percent of tangible common equity (TCE), places CFR (74%), TCBI (69%), ASB (41%), CMA (37%), ZION (28%), and RF (18%) at over 10%. Still, to keep this in perspective, if 25% of our coverage’s E&P and oilfield services exposure were to be written off, it would amount to less than a 35bp increase in NCOs and equate to a 2% hit to TCE. However, for some individual banks, this impact is much more meaningful. So while not a systemic risk, it is a material concern for some players.

FIGURE 1 Energy Exposure Rankings

20% 100% 15% 80% 60% 10% 40% 5% 20% 0% 0%
20%
100%
15%
80%
60%
10%
40%
5%
20%
0%
0%

Energy Loans / Total LoansRankings 20% 100% 15% 80% 60% 10% 40% 5% 20% 0% 0% 1 Not rated. 2

1 Not rated. 2 Loan mix estimated. Source: Barclays Research, Company reports, and SNL Financial LC

E&P + Oil Field Services / TCE (right axis)

Barclays | U.S. Large-Cap & Mid-Cap Banks

Nevertheless, we view our covered banks’ energy exposures as an earnings headwind as opposed to a capital concern. All else equal, we expect our bank coverage to remain profitable throughout a prolonged low oil price environment. Of note, not all energy loans are created equal. When reviewing energy loan concentrations and related energy loss reserves, we consider the specifics of the energy exposure as potentially more important than the absolute level, with loans to oilfield services companies and second lien E&P loans posing the greatest near-term risk.

FIGURE 2 Energy Loans Detailed (as reported)

 

% Total

 

Energy Loans by Type ($bn)

 

Loan Mix by Rating, Status

Energy Reserve

Criticized Loans

Deposits

 

E&P

OFS

Mid-

stream

Refining

& Mrktng

Vertical

Integ.

Other

Energy

Energy

Loans

% of

Total

% of

Loans IG

Total

Exposure

% of

Exposure

Utlization

Rate

Dollars

in mn

Percent

of Loans

Dollars

in mn

Percent

of Loans

in TX & LA

 

($bn)

Loans

($bn)

IG

ASB

$0.8

$0.8

4.1%

$1.0

75%

$42

5.6%

$210

28%

-

BAC

$4.9

$3.4

$5.6

$5.8

$1.6

$21.3

2.4%

$43.8

49%

$500

2.4%

$4,700

22%

9%

BBT

$0.9

$0.4

$0.0

$1.4

1.0%

$70

5.0%

3%

BOKF 1

$2.5

$0.3

$0.2

$0.1

$3.1

19.5%

$5.6

55%

$90

2.9%

$326

11%

24%

C

$6.2

$4.2

$5.6

$4.5

$20.5

3.3%

68%

$58.0

80%

35%

$800

3.9%

-

CFR

$1.2

$0.3

$0.1

$0.2

$1.8

15.3%

$54

3.1%

$160

9%

100%

CMA

$2.1

$0.5

$0.5

$0.6

$3.7

7.5%

$6.3

59%

$150

4.1%

$1,431

39%

18%

COF

$1.6

$1.0

$0.5

$3.1

1.3%

$190

6.1%

14%

FIBK

$0.1

$0.0

$0.1

1.5%

$0.1

76%

$6

7.7%

$27

36%

-

FITB

$0.8

$0.3

$0.3

$0.1

$0.2

$1.7

1.8%

$81

4.8%

-

GS

$1.8

1.9%

11%

$10.6

60%

17%

-

HBAN

$0.3

0.6%

$0.8

38%

-

HBHC 1

$0.6

$0.9

$0.1

$1.6

10.1%

$78

5.0%

$452

29%

64%

IBTX 1

$0.2

$0.0

$0.2

5.1%

$8

4.1%

$68

33%

100%

IBKC 1

$0.3

$0.3

$0.1

$0.7

4.8%

$27

3.9%

$150

22%

53%

JPM

$14.5

1.7%

$42.1

66%

34%

$725

5.0% 2

15%

KEY

$0.6

$0.1

$0.4

$0.1

$1.2

2.0%

$3.0

40%

$72

6.0%

$375

31%

-

LTXB 1

$0.5

$0.0

$0.1

$0.5

8.6%

$12

2.3%

$51

10%

100%

MS

$5.0

4.6%

$16.0

60%

31%

-

PB 1

$0.2

$0.2

$0.4

4.2%

$10

2.7%

87%

PNC

$0.7

$0.9

$1.0

$2.6

1.3%

-

RF

$1.0

$1.0

$0.4

$0.5

$3.2

4.0%

$3.4

93%

$150

4.7%

$900

28%

12%

STI

$0.7

$0.5

$3.0

2.2%

$137

4.5%

-

TCBI

$0.8

$0.2

$0.2

$1.2

7.2%

$32

2.7%

$199

17%

100%

USB

$1.6

$3.2

1.2%

70%

$173

5.4%

$917

29%

-

WFC

$9.6

$4.4

$3.5

$17.4

1.9%

$42.0

41%

$1,166

6.7%

$6,600

38%

7%

ZION

$0.8

$0.8

$0.6

$0.1

$0.2

$0.0

$2.6

6.5%

$5.0

53%

$131

5.0%

$794

30%

22%

Total/Median

 

$116.8

3.3%

68%

$237.7

63%

45%

$4,704

4.7%

$17,360

28%

23%

1 Not Rated. Data source for non-rated companies is company reports. 2 JPM's reserve is estimated. Source: Barclays Research and company reports

E&P, or “upstream”, loans are generally made to companies engaged in activities like searching for potential oil and gas fields, drilling exploratory wells and operating active wells. In the high-yield segment, these loans are collateralized by the value of the borrower’s oil and gas reserves. This reserve is typically valued by estimating reserves in the ground that can be extracted profitably and taking a haircut to oil price futures in determining the borrowing base. This borrowing base is subject to a base redetermination, typically every six months, based on a variety of factors including updated pricing (reflecting market and competitive conditions), energy reserve levels and the impact of hedging. This process typically occurs in March/April and September/October, though can occur more frequently. Typically, when borrowing bases are reduced it comes from the unfunded portion of the commitment, given that upstream borrowers typically do not draw the maximum available funding on their lines. In addition, E&P borrowers sometimes hedge their reserves. Still, these hedges do roll-off over time and typically last no more than one or two years.

Barclays | U.S. Large-Cap & Mid-Cap Banks

The “Midstream” sector is generally involved in the transportation, storage and marketing of crude and/or refined oil and gas products. Loans in this segment are made to companies that gather, transport, treat and blend oil and natural gas. Midstream loans are secured by pipes, tanks, trucks, rail cars, various water-based vessels, and natural gas treatment plants. In the current backdrop, there is little stress in this segment given we have yet to see significant numbers of producing wells being shut. “Downstream” loans are to refining companies that turn oil into value-added products for commercial sale. Refiners make money when the demand for fuel and value-added petroleum products is high and accordingly are not upset when crude prices trend lower.

Oilfield services companies work across all phases of production. They provide services like engineering, maintenance, geological surveying, etc. These products and services are primarily to the E&P segment. As such, when oil prices are under pressure and there is less demand from E&P companies, this segment comes under pressure. Typically given this segment’s exposure to oil prices, banks have more strict leverage requirements. Still, cash flows can come under significant pressure.

In addition to oil and gas loans, we are also monitoring loans in other lines of business to companies that have a sizable portion of their revenue related to oil and gas or could be otherwise disproportionately negatively impacted by prolonged low oil and gas prices. Metals & Mining is a sector that is getting increased attention, though we believe banks’ exposures here are roughly half of their energy exposures.

Barclays | U.S. Large-Cap & Mid-Cap Banks

CREDIT RESEARCH

Stress testing lower-for-longer oil prices

High Grade Credit Research Brian Monteleone * +1 212 412 5184 brian.monteleone@barclays.com BCI, US

Daniel Lang * +1 212 526 1424 daniel.lang@barclays.com BCI, US

* This author is a member of the Fixed Income, Currencies and Commodities Research department and is not an equity research analyst.

The six largest US banks have $80bn of credit exposure and $130bn of lending commitments to the energy sector 1 . Bank management teams have attempted to provide comfort to investors by highlighting that their expected losses from energy-related credits are low relative to exposure, earnings and capital. However, the different approaches taken by different banks in disclosing this analysis and a lack of granularity that does not allow investors to verify the results themselves has left many questioning whether things could be worse than expected. We highlight energy exposure stress test commentary provided during fourth quarter earnings calls:

JPMorgan: “We said last quarter if oil reached $30 a barrel, and here we are, and stayed there for call it 18 months, you could expect to see reserve builds of up to $750 million, and that assessment hasn’t fundamentally changed.”

Bank of America: “As an example, if we held oil prices at $30 per barrel for nine quarters, we estimate our potential losses on the energy portfolio would be roughly $700 million.” Note that this is a charge-off reference and that provisions would likely be a larger (though unquantified) amount.

Citigroup: “If our view changes to one where we believe that oil would be at $30 a barrel for a sustained period of time, we would estimate that our full year cost of credit for 2016 would be $1 billion, including both the impact of incremental reserves for our energy exposure, as well as the assumption that we begin to seeing knock-on effects on our broader portfolio. The $600 million estimated first half 2016 cost of credit that I referenced during the call was based on this scenario. Further, should our view change to oil at $25 a barrel for a sustained period of time, then our full-year estimated impact would roughly double.”

Wells Fargo: “We've sensitized it such that we're sitting here at the $30 area a year from now and believe that our allowance accurately or appropriately reflects the loss content that we may have.” This comment relates to management’s view that existing reserves of $1.2bn would be sufficient to absorb charge-offs over the stress period, but similar to Bank of America it does not provide guidance on incremental reserving.

Despite guidance from management teams that losses will be manageable, bank analysts are currently focused on the potential risk in a downside scenario. There are several key factors to consider in attempting to quantify the downside risk, namely the composition of banks’ energy portfolios, roll rates on currently undrawn lending commitments, the probability of default and loss given default (with the last three highly correlated to the price of oil). Therefore, we have run our own stress test of banks’ exposure to energy credits.

Determining oil price scenarios for stress test

We developed two oil price scenarios to test downside risk from banks’ energy exposure: a stressed scenario, in which oil stays at $30-35 for 2-3 years; and a severely stressed scenario, in which oil drops to $20 and remains there for 2-3 years. Note that both scenarios are more bearish than our commodity research team’s expectations and forward market pricing.

Our commodity research team believes that the oil market will return to balance in 2017 with prices in the $60 range (see The Blue Drum: Uncomfortably numb). This view is predicated on continued slow (but positive) global growth and a reduction in global production to bring the oil market into balance. Our energy credit research colleagues

1 JPM and BAC include derivative counterparty exposure

Barclays | U.S. Large-Cap & Mid-Cap Banks

estimated that if oil prices remain between $20 and $40, this would lead to a reduction of 738k-1,160k barrels per day of production from US E&Ps, which should help to close the supply-demand gap (see: E&P Leverage Spikes to Unsustainable Levels at $30/bbl WTI; Production Response Seems Inevitable).

We view this as a sanguine scenario for bank investors. However, oil futures are pricing WTI at a more bearish $39/bbl at year-end 2016, $43/bbl at year-end 2017 and $45/bbl at year- end 2018 (Figure 3). We understand there are certain weaknesses to using the forward curve as a predictor of future spot rates. For example, it can be skewed by the relative needs of different parties needing to hedge in the forward market, while storage costs inflate the futures curve, all of which may result in an overstatement of expected future spot pricing. That said, it is the lone market-based indicator of future pricing, and we highlight that it is pricing a more bearish scenario than our analysts.

FIGURE 3 Forward WTI curve

$/bbl 50 45 40 35 30 25 20 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18
$/bbl
50
45
40
35
30
25
20
Mar-16
Jul-16
Nov-16
Mar-17
Jul-17
Nov-17
Mar-18
Jul-18
Nov-18

Source: Bloomberg, Barclays Research

From a sensitivity perspective, stressed losses would not materially decline, in our view, unless oil was above $40/bbl. The second scenario is far more bearish. With oil at $20/bbl for an extended period, significant portions of the HY and IG E&P and oil field services segments of the energy sector would be at risk of default. A materially lower oil assumption would not have materially increased our stressed losses.

Assessing HY risk: Redetermination dilemma to affect RBL draws and defaults

In evaluating the risk to banks from HY energy lending, we considered both their funded and unfunded exposure. Banks’ disclosure on energy exposure remains lacking in terms of granularity. We have therefore examined publicly available information on the composition of lending commitments in an attempt to fill some gaps and provide a more robust analysis of potential losses. We used Bloomberg data on the classification of $100bn of undrawn loan commitments to HY energy companies to better understand the potential composition of banks’ portfolios. We estimate that 55% of the HY loan market’s unfunded commitments is to E&P, 25% to midstream, 15% to oil field services and 5% to integrated.

The upcoming spring redetermination period for HY E&P credits will be an important data point for bank investors in evaluating how much of this unfunded commitment is drawn. Our HY credit analysts estimate that E&P borrowing bases declined by 7% in the fall 2015 redetermination period and are likely to fall at least 20-30% in spring 2016. However, with oil now trading at $27/bbl, we believe the borrowing base cuts could be even more severe. This poses an interesting dilemma for HY E&Ps – either do nothing and watch their borrowing capacity severely decrease in hopes of maintaining a constructive relationship

Barclays | U.S. Large-Cap & Mid-Cap Banks

with their bank lenders or fully draw down on their revolvers in return for liquidity and improving their negotiating leverage with the banks (at the risk of being pushed into bankruptcy when their borrowing base is cut below the amount drawn).

We have two recent examples of stressed E&Ps taking the latter approach. Over the past several weeks SandRidge drew down $489mn on its $500mn facility, while Linn Energy drew down the remaining $919mn on its $3.6bn credit facility, which is now fully drawn, while hiring restructuring advisors.

We expect the struggling producers to follow SandRidge and Linn. This implies that more defaults may be coming sooner than expected. To the extent that the upcoming redetermination of borrowing base reduces the E&P’s borrowing capacity below the amount outstanding, borrowers will have to repay excess borrowings or face a decision on restructuring or default. The lowest cost producers may not feel the same near-term pressure to draw yet, given their ability to better absorb low oil prices. However, income from hedges will account for 45% of HY E&P credits EBITDA in 2016 and will materially diminish in 2017. If oil prices do not recover, even these healthier credits may ultimately choose to draw on their borrowing capacity. To be conservative, we assume that 100% of HY E&P and oil field services commitments are ultimately drawn.

Our HY energy analysts have estimated that at $37/bbl, 15-20% of HY energy companies will default in 2016, including 25% of HY E&Ps and 10% of HY oil services. If oil falls below $30/bbl, this would accelerate HY E&P defaults to over 50% in the next two years. At $20/bbl for an extended period of time, the problem will become more severe. We highlight our key assumptions in Figure 4.

Assessing the risk within investment grade revolvers

Bank disclosure regarding IG energy exposure is also lacking in terms of granularity. We undertook a similar examination of publicly available information to fill some gaps and to provide a more robust analysis of potential losses. We find approximately $300bn of investment grade revolver capacity has been provided by banks (through FactSet), of which 41% is to midstream companies, 21% E&P, 21% integrated, 11% oil field services and 6% refining. We use this breakdown to estimate the composition of banks’ unfunded exposure to IG counterparties.

We further analyzed the constituents of the IG revolver universe and estimate that in a stressed scenario where oil remains at $30-35 per barrel for the next three years, that 60% of E&P, 40% of midstream and 15% of oil field services credits would be at risk of drawing on their revolvers and that 25%, 10% and 15%, respectively, would be at risk of default. In a scenario in which the price of oil falls to $20 and remains there for three years, we estimate that the share of this universe at risk of default jumps to 75% for E&Ps and 80% for oil field services, with limited effect on midstream.

While banks IG exposure is largely unsecured, we believe stressed borrowers that draw on their revolvers will eventually be forced to provide collateral to banks. In a stressed environment, we would expect energy companies to breach covenants before reaching default. This provides an opportunity and leverage for the banks to seek and obtain collateral, effectively priming bonds and benefiting recovery on bank lines. We provide our key stress test assumptions in Figure 4.

Barclays | U.S. Large-Cap & Mid-Cap Banks

FIGURE 4 Key stress test assumptions

 

Stressed

Severely stressed

 

IG

HY

IG

HY

Draw rate:

E&P

60%

100%

100%

100%

Midstream

40%

40%

50%

50%

Oil field services

15%

100%

80%

100%

Default rate:

E&P

25%

50%

75%

90%

Midstream

10%

10%

10%

30%

Oil field services

15%

50%

80%

90%

LGD:

E&P

30%

30%

50%

50%

Midstream

10%

10%

20%

20%

Oil field services

70%

70%

80%

80%

Source: Barclays Research

Stress scenario

For our stress scenario, we assume oil remains at $30-35/bbl for the next three years. We note that granular disclosure regarding energy exposure is limited and sporadic and that we had to make many assumptions about the composition of the energy portfolios at most banks. To do this, we used company disclosures where available and applied a market portfolio where granular information was not available. Our key findings include:

We estimate that the six largest US banks would face over $17bn of credit losses from the energy sector over the next several years (Figure 5).

With over $3bn reserved for energy exposure, more than 20% of provisions have been taken for this scenario at the moneycenter banks. This shortfall represents 5% of aggregate consensus pre-tax profit (range 3-7%) over the next two years for the group and 1% of current CET1 capital (0.6-2.1%).

Wells Fargo would be the most affected bank in this scenario, with estimated losses of $5.9bn. Goldman Sachs would be least affected with estimated losses of $0.8bn.

Barclays | U.S. Large-Cap & Mid-Cap Banks

FIGURE 5 Estimated credit losses for energy exposure under stress scenario

 

BAC

C

WFC

JPM

GS

MS

Funded Energy Exposure

21.3

20.5

17.4

13.8

1.8

4.8

Unfunded Energy Exposure

22.5

37.6

24.6

28.3

8.8

11.2

Total Energy Exposure

43.8

58.1

42.0

42.1

10.6

16.0

Estimated stressed losses

Total Funded

1.8

1.4

3.0

1.6

0.2

0.5

Total Unfunded

1.2

2.0

2.9

1.4

0.6

0.5

Total

3.1

3.5

5.9

3.0

0.8

1.1

Reported/estimate reserves

0.5

0.8

1.2

0.7

0.1

0.2

Stressed incremental losses

2.6

2.7

4.7

2.3

0.7

0.8

After-tax charge/CET1 capital

1.1%

1.2%

2.1%

0.9%

0.6%

1.0%

After-tax charge/RWAs

0.11%

0.14%

0.23%

0.10%

0.08%

0.14%

Consensus 24 month pre-tax profit

Incremental loss/consensus PT profit

4.6%

5.6%

6.6%

3.2%

2.7%

4.4%

Source: Company reports, Barclays Research

Severe stress scenario

For our severe stress scenario, we assume oil falls to $20/bbl and remains there for the next three years. With oil trading at $27/bbl, it seems plausible that the market could get to $20. However, we believe oil prices remaining at $20/bbl for a period of several years is a severe scenario because pricing should be a catalyst for production cuts from higher cost producers that should allow the market to return to balance at higher prices. Our key findings under our severe stress scenario:

We estimate that the six largest US banks would face more than $60bn of credit losses related to the energy sector over the next several years. Incremental stressed losses from currently investment grade rated borrowers are the biggest drivers of loss inflation from our stress scenario.

Significant additional reserves would need to be built in this case, though this should be absorbed by pre-tax earnings and not create capital concerns. $60bn of credit losses would amount to roughly 20% of the $300bn consensus pre-tax earnings expected over the next two years from these six banks.

Wells Fargo and Citigroup ($17.4bn and $16.6bn, respectively) would face the largest losses in this scenario, while Goldman Sachs and Morgan Stanley would face the least ($2.7bn and $3.8bn, respectively). We believe this would be manageable for all the moneycenter banks.

We do recognize that in such a severe scenario, expectations for global growth, interest rates and net interest margins, and markets revenues may be lower than what is currently expected. Still, at 4% of CET1 capital, we believe this severe stress loss would be manageable even if profitability was significantly more stressed than it is currently expected to be.

Barclays | U.S. Large-Cap & Mid-Cap Banks

FIGURE 6 Estimated credit losses for energy exposure under severe stress scenario

 

BAC

C

WFC

JPM

GS

MS

Funded Exposure

21.3

20.5

17.4

13.8

1.8

4.8

Unfunded Exposure

22.5

37.6

24.6

28.3

8.8

11.2

Total Exposure

43.8

58.1

42.0

42.1

10.6

16.0

Estimated stressed losses

Total Funded

4.7

6.1

7.6

4.7

0.6

1.5

Total Unfunded

5.0

10.5

9.8

6.1

2.1

2.3

Total

9.7

16.6

17.4

10.8

2.7

3.8

Reported/estimate reserves

0.5

0.8

1.2

0.6

0.1

0.2

Stressed incremental losses

9.2

15.8

16.2

10.2

2.6

3.6

After-tax charge/CET1 capital

3.9%

7.0%

7.4%

3.9%

2.5%

4.2%

After-tax charge/RWAs

0.38%

0.84%

0.79%

0.45%

0.29%

0.59%

Consensus 24 month pre-tax profit

Incremental loss/consensus PT profit

16.7%

32.3%

22.7%

14.2%

10.6%

18.9%

Source: Company reports, Barclays Research

Barclays | U.S. Large-Cap & Mid-Cap Banks

EQUITY RESEARCH

Historical Perspective on Bank Energy Losses

U.S. Large-Cap & Mid-Cap Banks Jason M. Goldberg, CFA

1.212.526.8580

jason.goldberg@barclays.com BCI, US

Matthew J. Keating, CFA

1.212.526.8572

matthew.keating@barclays.com BCI, US

The impact that the ~70% decline in oil prices since June 2014 is likely to have on banks’ energy-related losses will depend in large measure on how long oil prices remain depressed. Energy-related classified loans increased significantly following the 2008-09 oil price declines, but NPLs rose more modestly and net charge-offs were manageable. To illustrate, BOKF’s loss rate on its E&P loans peaked around 45bps in 2009 (its 20-year average is ~5bp) and ZION reported less than 1% in peak annual energy losses during this downturn. To put these loan losses in perspective, residential real estate charge-off rates for the 100 largest U.S. banks peaked at 3.08% and charge-off rates on C&I loans overall reached 2.66% in 2009. However, the 71% decline in oil prices from June 2008 to February 2009 proved relatively short lived, with oil prices rebounding 90% from their February 2009 low by the end of 2009. Accordingly, the oil price decline of the last 18 months may be more akin to the 62% drop in oil prices from November 1985 through July 1986 since oil prices subsequently recovered by only 33% off their July 1986 low in the next two years.

FIGURE 7 WTI Oil Price, 2014 – YTD 2016

$/barrel $120 $100 $80 $60 $40 $20 $0 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15
$/barrel
$120
$100
$80
$60
$40
$20
$0
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16

Source: Barclays Research and Thomson Reuters

FIGURE 8 WTI Oil Price, 2007 – 2010

$/barrel $160 $140 $120 $100 $80 $60 $40 $20 $0 Jan-07 Jan-08 Jan-09 Jan-10
$/barrel
$160
$140
$120
$100
$80
$60
$40
$20
$0
Jan-07
Jan-08
Jan-09
Jan-10

Source: Barclays Research, Haver Analytics, and CME Group

FIGURE 9 WTI Oil Price, 1982 – 1990

$/barrel $40 $35 $30 $25 $20 $15 $10 $5 $0 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90
$/barrel
$40
$35
$30
$25
$20
$15
$10
$5
$0
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90

Source: Barclays Research, Haver Analytics, and CME Group

Barclays | U.S. Large-Cap & Mid-Cap Banks

Analyzing CFR’s energy loan portfolio (9% of its total loans in 1984) and related losses during the mid-1980s offers an interesting perspective on how high energy-related losses could go during a prolonged oil price downturn. CFR’s 1988 Annual Report indicated that its cumulative energy NCOs approached 11% from 1985-1988. However, it booked its most energy-related NCOs in 1985, which was before oil prices really started to decline. We would also point out that Texas-based banks faced the dual impact of lower energy prices and the collapse of the S&L industry in the 1980s, which likely exacerbated losses. Looking only at the years 1986-1988, CFR’s cumulative energy-related NCOs totaled only $2mn (less than a 2% cumulative loss). The median bank in our analysis maintained an energy reserve of close to 5% of energy loans at 4Q15.

FIGURE 10 CFR’s Energy Loan Portfolio, 1984 – 1988 $mn % loans $160 10% 9%
FIGURE 10
CFR’s Energy Loan Portfolio, 1984 – 1988
$mn
% loans
$160
10%
9%
$140
8%
$120
7%
$100
6%
$80
5%
4%
$60
3%
$40
2%
$20
1%
$0
0%
1984
1985
1986
1987
1988
Energy loans
% of total

Source: Barclays Research and Cullen/Frost filings

FIGURE 11 CFR’s Energy Loss Experience, 1985 – 1988, $ mn

 

Average

Energy

Energy NCO

Energy Loans

NCOs

Ratio

1985

$138

$15

11%

1986

$121

$5

4%

1987

$108

$2

2%

1988

$89

($5)

-6%

 

Cumulative

$16

11%

Source: Barclays Research and Cullen/Frost filings

Banks usually apply concentration limits to their energy-related portfolios to limit risk. The bulk of banks’ energy exposure is usually to senior loans and the majority is secured by reserves, equipment, real estate, and other collateral, or a combination of collateral types. Lending arrangements that are not secured are generally to investment grade borrowers. A great deal of this exposure is Shared National Credits, where another regulatory SNC exam is currently going on (as it switches to a semi-annual process). Finally, for those concerned that banks’ energy exposures might prompt another financial crisis, we note that our Large- Cap Banks coverage’s total energy/energy-related loans outstanding of ~$100bn (exposure is closer to $200bn) is far smaller than their exposure to housing and construction entering the Great Recession. In 2007, our Large-Cap Banks coverage had $964bn in mortgages on their books and another $349bn of H/E and $161bn of C&D (that’s $1.5trn in all, plus lots of off-balance sheet risks and much lower capital levels).

We expect energy-related losses to remain manageable for the industry, but do anticipate energy-related NCOs picking up in 2016, with associated loan loss provision increases pressuring earnings for some. According to a February 3 Reuters article, entitled “U.S. regulators expected to classify more energy loans as high risk”, bank regulators are likely to classify more oil and gas loans as high risk when they start the new bank portfolio review (commenced in early February), due to the fall in crude prices to a 12-year low since their last review. This action is expected to further cut credit access and escalate defaults for cash-starved energy companies and prompt banks to further increase their reserves for energy losses. According to Thomson Reuters LPC data, the average bids on U.S. oil and gas loans fell to 76.6 on February 2 from 79.1 at year end and a recent peak of 92.8 in May 2015. Finally, many E&P companies have hedged against price declines, but this revenue is non-recurring and will run-off as hedges mature, potentially affecting future operating cash

Barclays | U.S. Large-Cap & Mid-Cap Banks

flows and long-term loan serviceability. Of the 27 banks in our analysis, only two (LTXB and TCBI) emphasized a significant benefit from hedging among their E&P borrowers on their 4Q15 conference calls.

Banks’ Near-term Loss Expectations

On the 4Q15 earnings calls and at recent conferences, several banks offered their near-term outlooks should oil prices remain pressured. If their assumptions prove accurate, the expected losses appear very manageable given the group’s current earnings capacity (over $50bn in quarterly PPNR).

FIGURE 12 Summary of Management Comments on Loss Expectations

4Q15

LOSS EXPECTATIONS

BAC

$700mn NCOs; +$900mn LLP

C

$1bn cost of credit, if oil ~$30/bbl; will double if oil ~$25/bbl

CMA

If oil prices remain @$30/bbl for 1 yr with static ln balances, expect +$75-125mn LLR build

COF

+50mn in add'l LLR build if prices remain at these levels

CFR

With oil ~$30/bbl in 2016, no plans to increase reserve

FITB

If low oil prices persist thru 2017, will continue to build reserves

JPM

Add'l +$750mn in LLR build, if prices remain ~$30/bbl for 18mos

PNC

$200mn of not asset-based/IG loans pose the greatest risk

RF

Add'l NCOs of $50-$75mn in 2016 if prices stay, and add'l $50mn if prices fall to ~$20/bbl

STI

NCOs/NPLs in E&P/OFS portf will be elevated over the next couple of years

TCBI

2016 provision est. of ~$65mn is based on oil @ $35/bbl

USB

Reserve levels assume oil prices stay at depressed levels for the near future… if prices decline may see add'l stress in energy portf; will not have material impact on credit perf

WFC

Expects higher losses in 2016 if low oil prices persist

ZION

$75-$100mn in losses with oil at ~$30/bbl

Z I O N $75-$100mn in losses with oil at ~$30/bbl Source: Company and Barclays Research

Source: Company and Barclays Research

ASB: ASB is a bit more negative than most on the near-term prospects for its energy lending business (4% of its total loans). If oil prices remain at recent levels going into the Spring borrowing base redetermination, it sees more restructurings and bankruptcies across the energy industry. More specifically, it expects a lot of pain for the oil patch if WTI drops below $30 a barrel for an extended period. In this scenario, ASB sees further downward risk migration and additional reserve builds. Its energy reserve totaled $42mn (5.6% of its energy loans) at 4Q15.

BAC: If oil prices remain at $30 per barrel for nine quarters, BAC estimates potential losses in its energy portfolio at around $700mn. Based on its $21.3bn energy loan portfolio, this translates into cumulative energy-related losses of around 3.3%. BAC’s energy reserve totaled 2.4% of its energy loans at 4Q15.

BBT: Since BBT’s energy business is comparatively small, it does not anticipate energy becoming a major issue. It monitors its oil and gas exposure by running stress/sensitivity analysis (its stress scenario sets crude oil price at $20 or below). Although BBT does not anticipate major problems, if oil goes to extreme lows it thinks some near-term challenges are possible.

BOKF (Not Rated): BOKF’s stressed oil scenario assumes prices of $25 a barrel in 2016, $28 in 2017, $30 in 2018, $35 in 2019, and $42 in 2020 and thereafter. The inherent loss content in this scenario is factored into its most recent guidance calling for $60-$80mn in provisions ($33.5mn in 2015) in 2016.

Barclays | U.S. Large-Cap & Mid-Cap Banks

C: C expects its ICG unit’s 1H16 credit costs to be roughly $600mn ($1bn for full-year), which assumes oil prices stay around $30 a barrel for a sustained period (i.e. one year). However, if oil prices drop to $25 a barrel and then stay there for a sustained period of time, it sees its 1H16 credit cost forecast potentially doubling to $1.2bn. C’s energy reserve totaled $800mn or 3.9% of its energy loans at 4Q15.

CFR: CFR’s $22mn energy reserve build in 4Q15 stemmed from its oil sensitivity analysis at $28.13 a barrel in 2016 and its assumption that oil prices stay below $40 a barrel through 2020. If oil prices remain at $30 a barrel in 2016, it does not anticipate a large increase in its energy reserve ($54mn or 3% of its energy loans at 4Q15).

CMA: CMA expects its energy charge-offs to be manageable, but sees further negative credit migration in the quarters ahead. If oil prices remain at $30 for all of 2016, it estimates the impact on its reserves ($150mn or 4%+ of energy loans at 4Q15) in the $75-$125mn area.

COF: With oil prices down from year-end 2015 levels, COF anticipates increases in its criticized and nonperforming loans, additional reserve builds (~$50mn from 4Q15 quarter- end levels all else equal) and possible increased charge-offs in 2016.

FIBK: FIBK believes that recent oil prices are at levels that put more stress on borrowers and it is beginning to be much more proactive in terms of addressing potential problem loans. However, given its limited exposure and general stable credit trends throughout the downturn in the oil and gas, it feels comfortable its risk is well managed. It does not expect any continued weaknesses in oil prices to impede its ability to generate profitable growth in

2016.

FITB: FITB thinks it is appropriately reserved based on current forward oil prices. However, if low oil prices persist through 2017, it expects continued reserve build.

HBHC (Not Rated): HBHC’s estimates that its charge-offs from its energy-related credits will approximate $50-$75mn over the duration of the cycle.

IBKC (Not Rated): If oil prices go down to low/mid $20s and stay there for more than a year, IBKC thinks it will likely have some additional provisioning. However, it does not see a scenario where its provisioning is not manageable.

JPM: Given the decline in oil prices since the start of this year, JPM anticipates continuing to build its energy reserves (+$124mn in 4Q15) in 2016. However, it emphasized that prices would need to remain at recent levels for an extended period for reserve builds to be significant. If oil prices remained at $30 a barrel for 18 months, JPM envisions another $750mn of reserve build.

RF: Should energy prices stay at recent levels, RF expects charge-offs in the $50mn-$75mn range in 2016, which is down from its previous guidance of $50mn-$100mn due to the energy loans it charged-off in 4Q15. However, if oil prices decline into the $20s, RF sees $50mn in incremental charge-offs as possible. Its energy reserve was $150mn (4.7% of energy loans) at 4Q15.

STI: STI expects losses in its E&P and oilfield services portfolios to be elevated over the next couple of years, which will likely result in its overall C&I loss rate rising from recent low levels.

TCBI: TCBI thinks its energy portfolio is in good shape and that it is appropriately reserved. Its updated base case oil and gas price deck assumes $42.50 per barrel of oil and $2.30 per mcf for gas. Its sensitivity case assumes $37.50 per barrel of oil and $2.00 per mcf of gas. Its 2016 provision guidance (~$65mn) is based on $35 oil throughout 2016.

Barclays | U.S. Large-Cap & Mid-Cap Banks

USB: USB considers its 5.4% energy reserve reasonable, with oil prices around $30 a barrel. However, based on the uncertain outlook for commodity prices in the near-term and the potential for further energy price declines, it said it could see additional stress within its energy and metals-related loan portfolios in 2016.

WFC: Since it takes time for losses to emerge, WFC expects to experience higher oil and gas losses ($118mn in 4Q15 and $90mn in 3Q15) in 2016 based on recent price levels. However, if oil stays at $30 for the next year, it thinks its $1.2bn (7.1% of energy loans) oil and gas reserve is sufficient.

ZION: ZION’s consolidated 2016 NCO expectation calls for NCOs of only 0.30-0.35% of total loans, with most of this coming from its energy portfolio. It increased its energy loan loss outlook for the nine quarters ending 4Q16 to $116-$141mn from $75-$125mn (based on the $41mn in oil and gas NCOs it has incurred to-date and its expectation for $75-$100mn in NCOs over the next four quarters). Its loss assumptions are based on oil prices remaining around $30 a barrel. ZION’s energy reserve totaled $131mn (5% of its energy loans) at

4Q15.

Assessing Energy Reserves

Disclosures from 4Q15 results season allow for more meaningful comparisons of energy exposure and reserves, as banks provided more details on their energy lending portfolios composition (E&P, oilfield services, midstream, and other), their energy reserve levels, and their “criticized” energy loan percentages (a criticized asset is rated special mention, substandard, doubtful, or loss as defined by the agencies' uniform loan classification standards). Analyzing these disclosures reveals a positive correlation between banks’ energy reserves and criticized energy loan percentages. Based on this relationship, the banks that appear to maintain the healthiest energy reserves include: FIBK, WFC, KEY, and ASB. Conversely, the banks where energy reserves look comparatively low based on disclosed criticized energy loans include: CMA, IBTX, BAC, and TCBI.

FIGURE 13 Criticized Energy Loans vs. Energy Reserve

Energy reserve % 9% 8% FIBK 7% WFC 6% KEY ASB USB 5% HBHC ZION
Energy reserve %
9%
8%
FIBK
7%
WFC
6%
KEY
ASB USB
5%
HBHC
ZION
RF
IBTX
4%
CMA
IBKC
3%
CFR
BOKF
TCBI
LTXB
BAC
2%
1%
0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%

Source: Barclays Research and Company reports

Criticized energy loans %

Barclays | U.S. Large-Cap & Mid-Cap Banks

Our analysis shows a negative correlation between banks’ energy loan concentrations (energy loans as a percentage of total loans) and their energy reserves. Banks with comparatively large energy concentrations (BOKF, CFR, LTXB, and TCBI) tend to have below-average energy reserves. Conversely, the higher energy reserves were found at banks with comparatively low energy concentrations (FIBK, WFC, COF, and KEY).

FIGURE 14 Energy Loan Concentration vs. Energy Reserve

Energy reserve %

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

FIBK WFC
FIBK
WFC
Energy reserve % 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FIBK WFC C

COF

reserve % 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FIBK WFC C O

KEY

USB

% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FIBK WFC C O F

ASB

BBTJPM ZION HBHC FITB RF STI IBTX CMA C IBKC CFR BOKF PB TCBI BAC
BBTJPM
ZION
HBHC
FITB
RF
STI
IBTX
CMA
C
IBKC
CFR
BOKF
PB
TCBI
BAC
LTXB

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

Energy loan concentration %

Source: Barclays Research and Company reports

The apparent inverse relationship between banks’ energy loan concentrations and energy reserves could make sense if banks with more experience in the industry take less risk. Disclosures from the 4Q15 results season reveal that banks with outsized energy concentrations tend to also have comparatively low percentages of criticized energy loans. We attribute this relationship to banks with large energy portfolios having generally been in this business throughout multiple cycles. We think their experience and longstanding client relationships may enable them to avoid some of the more risky energy credits, which are the first to show problems in times of stress. Varying energy reserve levels may also stem from differences in the mix of energy portfolios, as banks with elevated energy lending concentrations tend to skew more toward E&P lending as opposed to the more risky oilfield services area.

Barclays | U.S. Large-Cap & Mid-Cap Banks

FIGURE 15 Energy Loan Concentration vs. Criticized Energy Loans

Criticized energy loans % 45% 40% CMA WFC FIBK 35% IBTX KEY 30% ZION USB
Criticized energy loans %
45%
40%
CMA
WFC
FIBK
35%
IBTX
KEY
30%
ZION
USB
HBHC
RFASB
25%
BAC
IBKC
20%
TCBI
15%
BOKF
10%
LTXB
CFR
5%
0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%

Source: Barclays Research and Company reports

Energy loan concentration %

Banks seem to agree that loans to oilfield services companies are more risky than loans to E&P or midstream firms. HBHC’s 4.95% energy reserve at 4Q15 included a 7.1% reserve on its oilfield services exposure, a 2.2% reserve on its E&P loans, and a 0.7% reserve on its midstream loans. However, this sentiment does not seem to be universally reflected in banks’ reserving methodologies. Our analysis fails to show a strong positive correlation between oilfield services exposure and energy reserves. In fact, PB, a bank with one of the highest oilfield services lending exposure (55% of its energy loans), maintained one of the lowest energy reserves (2.7%) at 4Q15.

FIGURE 16 Oilfield Services Energy Loan Concentration vs. Energy Reserve

Energy reserve % 9% 8% FIBK 7% WFC COF 6% KEY USB 5% ZION HBHC
Energy reserve %
9%
8%
FIBK
7%
WFC
COF
6%
KEY
USB
5%
ZION
HBHC
FITB
RF
STI
IBTX
4%
CMA
C
IBKC
3%
CFR
BOKF
TCBI
PB
BAC
LTXB
2%
1%
0%
0%
10%
20%
30%
40%
50%
60%
70%

Oil field services energy concentration %

Note: Includes estimates. Source: Barclays Research and company reports

Barclays | U.S. Large-Cap & Mid-Cap Banks

Lateral Implications

Regional Economies

We are closely watching regional and secondary impacts, particularly in the states: Texas, North Dakota, Pennsylvania, Louisiana, Colorado, Wyoming, and Oklahoma. While these economies are very diverse, a meaningful portion of growth coming out of the financial crisis was driven by the energy sector. As the energy sector scales back, we will be closely watching unemployment trends and real estate valuations in these geographies. Looking at our coverage CFR and TCBI are concentrated in Texas, while PNC has 35% of its deposits in Pennsylvania and First Interstate has 35% in Wyoming. On the international front, markets like Russia and Venezuela have come under stress. While not a meaningful factor for most of our coverage, banks exposed to countries whose sovereign debt is supported by oil production may be at increased risk. Of our coverage, C maintains the most exposure to international and emerging markets.

FIGURE 17 Percent of Parent Deposits by State, 2015 Pro forma (%)

 

Colorado

Louisiana

North Dakota

Oklahoma

Pennsylvania

Texas

Wyoming

Total

CFR

-

-

-

-

-

100.0

-

100.0

IBTX 1

-

-

-

-

-

100.0

-

100.0

LTXB 1

-

-

-

-

-

100.0

-

100.0

PB 1

-

-

-

13.2

-

86.8

-

100.0

TCBI

-

-

-

-

-

100.0

-

100.0

BOKF 1

6.2

-

-

55.1

-

23.6

-

84.8

HBHC 1

-

60.0

-

-

-

4.4

-

64.4

IBKC 1

-

41.3

-

-

-

11.5

-

52.8

PNC

-

-

-

-

34.9

-

-

34.9

FIBK

-

-

-

-

-

-

34.8

34.8

ZION

5.6

-

-

-

-

21.9

0.0

27.5

CMA

-

-

-

-

-

17.9

-

17.9

JPM

1.0

1.7

-

0.4

0.0

13.8

-

16.8

COF

-

8.3

-

-

-

5.9

-

14.2

BBT

-

-

-

-

10.0

3.1

-

13.2

WFC

2.7

-

0.2

-

3.2

6.5

0.2

12.9

RF

-

7.3

-

-

-

4.6

-

11.9

BAC

0.2

-

-

0.4

1.0

9.1

-

10.7

KEY

3.4

-

-

-

5.7

-

-

9.1

USB

4.2

-

0.6

-

-

0.0

0.2

4.9

HBAN

-

-

-

-

4.7

-

-

4.7

ASB

--

-

-

--

-

-

C

--

-

-

--

-

-

FITB

--

-

-

--

-

-

GS

--

-

-

--

-

-

MS

--

-

-

--

-

-

STI

--

-

-

--

-

-

1 Not Rated. Data source for non-rated companies is from SNL Financial LC. Source: Barclays Research and SNL Financial LC

Companies are cancelling new projects, reducing drilling activity, and laying off employees. This hurts local businesses through lower consumer and business spending and state and local tax revenues. Credit quality deterioration in these areas has not been an issue, but is a risk. We note on COF’s 4Q15 earnings call it said that looking at geographies with high energy employment concentration it has seen a slight uptick in credit card delinquencies. Still, USB said this week it has seen no evidence that job losses in energy-related markets have adversely impacted its consumer portfolio. We also note that while reduced oil prices may negatively affect job growth in energy producing states, it does result in consumers

Barclays | U.S. Large-Cap & Mid-Cap Banks

paying lower prices at the pump, adding up to savings of almost $1,000 annually per household, relative to the middle of 2014, by our estimates.

Real Estate

When assessing the impact on banks from the continued oil price declines, investors are beginning to look beyond direct energy and energy-related lending exposure and toward potential contagion risks. Texas is the U.S. state that is the most exposed to energy weakness. Moreover, within the Lone Star State, Houston is generally considered the epicenter of the energy industry. The near-term contagion concerns focus on Houston’s commercial real estate (CRE) market and to a lesser degree its residential housing market. Our covered banks with the most branches and deposits in Houston include: JPM, WFC, BAC, ZION, CFR, COF, CMA, TCBI, RF, and EWBC.

The Dallas Federal Reserve’s employment forecast for Texas points to job growth of 1.1% in 2016, which is slightly below the 1.4% growth the state recorded in 2015. Texas grew jobs by 3.4% in 2014. As long as oil prices average above $30 per barrel in 2016, the Dallas Fed sees positive job growth in Texas driven by continued strength in sectors such as health care and leisure and hospitality and in metro areas such as Dallas, Austin and San Antonio. However, if oil prices average below $30 per barrel for the year, the Dallas Federal Reserve cautioned that Houston could begin to show net job losses.

Fortunately for banks operating in Texas, economic growth in most of the state’s major markets remains vibrant. Houston is the only major city in Texas where the steep decline in oil prices is adversely impacting economic growth. To illustrate, Dallas posted 4.2% job growth in 2015, Austin increased employment by 4.0%, and San Antonio grew jobs at a healthy 3.3% clip. By contrast, employment in Houston rose a modest 0.3% in 2015. At the end of 2015, the non-seasonally adjusted unemployment rates in Austin (3.1%), San Antonio (3.5%), and Dallas (3.7%) were all well below the 4.8% national average. Houston’s 4.6% unemployment rate at December 2015 was up from 4.0% as recently as March 2015.

FIGURE 18 Largest Banks Operating in Houston, Texas by Branches and Deposits, 2015 ($bn)

 

Total

Total

Percent of

Rank Institution (HQ state, ticker)

Number of

Branches

Deposits in

Market

Deposit

Market

Total

Deposits

1 JPMorgan Chase & Co. (NY, JPM)

226

$84.4

40.9%

7.9%

2 Wells Fargo & Company (CA, WFC)

208

$25.2

12.2%

2.3%

3 Bank of America Corporation (NC, BAC)

112

$19.1

9.2%

1.6%

4 Banco Bilbao Vizcaya Argentaria, SA

77

$13.5

6.5%

21.6%

5 Zions Bancorporation (UT, ZION)

66

$9.9

4.8%

19.9%

6 Prosperity Bancshares, Inc. (TX, PB)

61

$4.7

2.3%

26.9%

7 Cullen/Frost Bankers, Inc. (TX, CFR)

30

$4.1

2.0%

17.1%

8 Capital One Financial Corporation (VA, COF)

53

$4.0

1.9%

2.0%

9 Comerica Incorporated (TX, CMA)

55

$3.6

1.8%

6.3%

10 Woodforest Financial Group, Inc. (TX)

106

$3.1

1.5%

77.7%

11 Cadence Bancorp, LLC (TX)

11

$2.5

1.2%

39.0%

12 Texas Capital Bancshares, Inc. (TX, TCBI)

2

$2.2

1.1%

15.5%

13 Regions Financial Corporation (AL, RF)

28

$2.0

1.0%

2.1%

14 Green Bancorp, Inc. (TX, GNBC)

13

$2.0

1.0%

64.1%

15 Allegiance Bancshares, Inc. (TX, ABTX)

16

$1.6

0.8%

100.0%

16 BOK Financial Corporation (OK, BOKF)

13

$1.5

0.8%

7.0%

17 IBERIABANK Corporation (LA, IBKC)

7

$1.4

0.7%

8.9%

18 CBFH, Inc. (TX)

19

$1.4

0.7%

55.5%

19 Independent Bank Group, Inc. (TX, IBTX)

11

$1.1

0.6%

28.7%

20 East West Bancorp, Inc. (CA, EWBC)

9

$1.1

0.5%

4.3%

 

Top 20 Total For Institutions In Market

1,123

$188.2

91.2%

1,484

$206.4

Source: Barclays Research and SNL Financial LC

Barclays | U.S. Large-Cap & Mid-Cap Banks

FIGURE 19 Unemployment Rate – Texas vs. U.S. 8% 7% 6% 5% 4% 3% Jan-14