- Wells Fargo expects `correlated stress' in oil-dependent areas
- Goldman's Cohn says `markets well equipped to deal with this'
Slumping oil prices and their effect on bank lending and markets were a topic of discussion Tuesday at a financial services conference in Miami, on calls with analysts and televised interviews. Investors are closely watching banks’ exposure to energy as rising OPEC output and resilient U.S. shale production intensifies a global glut. Here are some comments by lending and financial services executives collected by Bloomberg:
John Shrewsberry, chief financial officer, Wells Fargo & Co.
“At the end of the year, we had $42 billion of total exposure to oil and gas, including loan commitments and unutilized commitments, down 5 percent from a year ago. Loans outstanding were $17.4 billion, down 6 percent from a year ago and less than 2 percent of our total loans outstanding.”
“While we have not experienced measurable differences in the portfolio performance between oil and non-oil communities, over time, we would expect some correlated stress in communities that are dependent on oil and gas.”
Shrewsberry said that if oil prices remain in the $20s or low $30-range for the next six months, banks are likely to reduce the amount of credit available to energy companies. As a result, “it probably will put more pressure on the average bank to increase the allocated reserve,” he said. (Transcript)
Jay Wintrob, chief executive officer, Oaktree Capital Group
“We expect a meaningful uptick in the U.S. high-yield bond default rates over the next 12 months with distressed energy sector contributing most significantly. As I believe you know, over the last five years, the average default rate has been just about the lowest in history for such a period. Now supporting the expectation that defaults will increase is the sharp increase over the past year in the fraction of U.S. high-yield bond universe trading at or below 70% of par. This stressed cohort grew to 15% at the end of 2015. Additionally, billions of dollars in investment grade energy and metals and mining debt could be downgraded to high yield status if commodity prices remain depressed.”(Transcript)
Gary Cohn, president, Goldman Sachs Group Inc., in Bloomberg TV interview
“We are clearly in an oversupply oil market. This has to clear itself up. We believe that it will clear itself up as we get into the spring turnaround season. Once we get through spring turnaround, we will get to a more rational balanced oil picture.
There is debt out there. There are companies that are leveraged to the price of oil. Those companies will have to go through some form of restructuring, which is quite natural for the market. I think the financial markets are well equipped to deal with this.”
Kathy Rogers, CFO, U.S. Bancorp
“Our energy portfolio represents just a little bit more than 1 percent of our overall portfolio, and I thought I would just talk a little bit more about that. We did disclose at the end of 2015 that our reserves against energy are set at about 5.4 percent. So we feel like, we’re in a very good position. I do want to talk about exploration and production loans. These are the loans that are most impacted by changes in oil prices, and these represent about 50 percent of our energy portfolio.” (Transcript)
Lloyd Blankfein, CEO, Goldman Sachs
“The market is interpreting every twitch in the price of oil as if it’s a plebiscite on what the demand expectations are for the world and growth in the world. We just don’t think that.” (Transcript)
Kelly King, CEO, BB&T Corp.
“Obviously, energy is under stress. But you take a portfolio like ours, it’s 1 percent of our outstandings and it’s 70 percent in reserve-based lending, and about 30 percent in midstream and it’s probably got nothing in oilfield services."
“Even with oil prices where they are, we don’t have any non-performance, no non-accruals, no past dues.”(Transcript)
Robert Walsh, CFO, Evercore Partners Inc.
“What’s interesting about energy is we see it as broader than a restructuring opportunity.”
“We’re seeing a more diverse set of opportunities, we’re seeing distressed M&A. The values of those transactions may be lower than they would have been 18 months ago, but they’re good transactions for clients. They’re thoughtful and they’re strategic, and they keep firms in business that have good platforms. And while I wouldn’t say we’re seeing a significant set of capital raising transactions or capital raising opportunities today, there’s clearly capital that’s on the sidelines and poised to enter.” (Transcript)