Some U.S. banks have been moving to reduce their exposure to energy, an industry experiencing significant turmoil during the fallout from the COVID-19 pandemic.
Uncertainty regarding the economic impact of COVID-19 has prompted banks to disclose exposure to at-risk industries, and oil price volatility could lead to credit quality issues for lenders with significant energy exposure. During first-quarter earnings calls, many banks disclosed their exposure to the sector and offered additional commentary on their expectations for the future of their energy portfolios.
Of banks that reported earnings during the week ended May 1, Oklahoma City, Okla.-based Bank7 Corp. disclosed the most energy exposure as a percentage of gross loans at 12.2%. This is down from 18% of gross loans a year ago, Jason Estes, chief credit officer, said on the company's first-quarter earnings call.
Bank7 has been actively reducing its energy lending activity for more than a year due to price and supply-driven slowdown, Estes said.
"Now the pandemic has destroyed demand and the industry devastation is being well-documented," he said. "The energy recovery will be slower, and it appears that there will be a lasting impact on companies and the industry overall."
Estes said he expects the company's energy portfolio to shrink throughout the year. However, during the last downturn, the company was given opportunities to extend more energy credit and could be opportunistic again during this downturn.
"Overall, I expect energy to make up less of our portfolio long term, it would not surprise me if we're opportunistic and have a few really nice opportunities that make long-term sense to extend credit," he said.
Cullen/Frost Bankers Inc. has been working to diversify its loan portfolio and reduce its exposure to the energy industry, Bill Day, senior vice president of corporate communications, said in an interview.
The company disclosed $1.6 billion in outstanding energy loans, or 10.2% of gross loans, in the first quarter. This is down from about 16.0% of total loans in 2015 and 11.2% in the fourth quarter of 2019, Chairman and CEO Phillip Green said on the company's first-quarter earnings call.
"Even before this latest challenge to the energy industry, we had been consolidating and working on our portfolio to diversify it," Day said. "We're working to reduce that percentage, take some of that volatility out and restore more stability."
Cullen/Frost plans to get its total energy exposure below 10%, Green said on the earnings call. "I'd like to see it move more towards the mid-single digits over time," he said.
Houston-based Cadence Bancorp. disclosed $1.5 billion in outstanding energy loans, or 11.0% of gross loans. Midstream makes up the majority of the company's energy portfolio at 63%. Cadence has had a history of credit quality issues in recent quarters, but the company is stress testing its midstream portfolio and feels pretty good about it, Chairman and CEO Paul Murphy said on the company's first-quarter earnings call.
The company currently has one borrower just under $20 million in its exploration and production portfolio that is nonperforming, Murphy said.
Hedging provides comfort for energy borrowers and the bank, but the duration of the downturn is the main variable that will determine future stress on the portfolio, according to Murphy.
"The hedging gives people protection to get through this period. But if prices stay low longer, that would mean more stress for the portfolio over time," Murphy said.
