Bank investors face a new fear: oil company failures
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After weeks of fears that lower interest rates could squeeze bank profits, investors were faced with an even more alarming possibility on Monday: that a collapse in oil prices could trigger a wave of debt defaults on bank loans. borrowers.
By the end of the day, US bank stocks had posted their worst single-session performance since 2009 and the industry was a big contributor to a global stock market rout.
America’s four biggest banks, JPMorgan Chase, Bank of America, Citibank and Wells Fargo all fell between 12% and 16%, destroying some $ 120 billion in market value. The industry has now erased all of its stock market gains dating back to October 2016.
Bank stocks had been falling steadily since late February, fearing that lower long-term interest rates would depress loan yields. Filing fees are already close to zero for many major lenders and can drop a little more, robbing the industry of what would traditionally be a compensatory advantage in times of declining rates.
The collapse in oil prices added fears that defaults, which were hovering at historically low levels, could increase. While U.S. banks’ direct exposure to the oil industry is only 2%, according to Autonomous Research, indirect exposure to adjacent regions and sectors could be significant.
Investors slashed shares of regional banks in the shale oil states of Texas and Oklahoma by 20% to 30%.
There have been “sales with no mitigation if you have Texas in your name or energy in your wallet,” said Brad Milsaps, analyst at Piper Sandler, as smaller banks such as Cadence Bancorp, Cullen / Frost Bankers, Texas Capital Bancshares and BOK Financial have been hit by furious sales. .
“With the prices where they are, the [oil] drillers will not generate enough cash flow, after covering their debt, for capital expenditures to drill new reserves. So the worry is they just file for bankruptcy and start over, ”Milsaps said. During the last oil crash in 2016, private equity and capital markets were widely open to oil drillers who needed to recapitalize, and this is no longer the case, he added.
Fears about bank profitability have also been reflected in spreads on credit default swaps, insurance-type derivatives that protect against the risk of them failing to pay their debts. JPMorgan’s CDS spread, for example, rose 50% on Monday, to 98, according to data from IHS Markit, which means insuring $ 10 million in bank bonds against default costs now about $ 98,000 per year, up from $ 65,000 previously. CDS prices from other major banks have increased in similar proportions.
“We have a perfect storm” for the banks, said Mark Grant, chief global strategist at investment bank B Riley FBR.
Low rates are “substantially bad” for bank profit margins, and “there is no return on treasury bills and agencies. [mortgage-backed securities] and it’s not good either [so] you can’t make money in your business operations, ”said Mr. Grant
The pain was shared by European banks, with the Euro Stoxx Banks index falling 13%. One of the hardest hit was France’s Natixis, which fell 18%. National competitors Societe Generale and Crédit Agricole have also been criticized, with their shares falling by 18% and 17% respectively.
“Within French banks, Natixis and Crédit Agricole are more exposed to oil and gas with 5 to 6% of the group’s credit exposures,” said Kian Abouhossein, analyst at JPMorgan.
“Such a steep and rapid drop in prices is doing more harm than good,” he said, as the crisis could reduce corporate spending, increase downgrades and credit defaults and depress emerging markets and markets. currencies linked to commodities.
Italian lenders were also caught in the sale after the government imposed a four-week lockdown on 16 million people in 14 northern provinces in a bid to stem the spread of the coronavirus. Intesa Sanpaolo had also just launched an unsolicited bid for small rival UBI Banca SpA, which analysts say could now be at risk.
UniCredit plunged 13% and Intesa Sanpaolo lost 12% in a fall that threatens to undermine their nascent recovery after a decade of painful restructuring.
Despite the disappointing declines, JPMorgan’s Mr Abouhossein said most of the world’s banks should be able to absorb any loss on their credit portfolios without hampering their ability to lend and pay dividends.
Saudi Arabia’s decision to start a price war with rival producers on Monday caused oil prices to drop 30%, to between $ 33 and $ 36 a barrel. Oil prices “fell to levels at the start of 2016, when the lowest was in the mid-1920s and European bank losses were manageable during that period,” Abouhossein said.