Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

How do $45 billion of energy loans suddenly appear in a bank's balance sheet? Mitsubishi UFJ Financial Group's exposure to the industry responsible for the most global bankruptcies in the past year jumped to 10.4 trillion yen ($95 billion) from 5.5 trillion yen since its last semi-annual report.

The eye-popping difference is due in part to a change in what the Japanese bank considers energy exposure. This time it added mid- and downstream borrowers, as well as miners. In simple terms, the previous figures excluded many refineries and pipelines.

While it could look as though MUFG has been withholding information from investors, the lender in fact is being more transparent than many Western peers. The level of detail provided by banks on their loan books varies widely, even in the most stringent regulatory environments.

Take London, for instance. Standard Chartered's breakdown of energy exposure in its annual report indicated $9.6 billion of loans were to oil and gas producers, $7 billion to services companies and $5.9 billion to refineries. HSBC, by contrast, didn't mention refineries in its annual report, saying that:

"The overall portfolio of exposures directly exposed to oil and gas companies had drawn risk exposures amounting to about $29bn (2014: $34bn) with sub-sectoral distributions as follows: integrated producers 48%, service companies 28%, pure producers 17% and infrastructure companies 7%."

Investors are left to guess whether refineries are contained in any of those baskets and whether ``drawn risk exposures" equals the amount energy companies owe HSBC. There's nothing wrong with that: Banks aren't obliged to disclose all details of their lending. Chief Executive Officer Stuart Gulliver later told analysts on an earnings call that refiners were only 1 percent of HSBC's book.

In MUFG's case, the exposure to refineries and pipelines doesn't look particularly excessive. Downstream and midstream oil and gas companies listed on public markets globally have $742 billion in total debts. Add an extra 50 percent to account for ``shadow loans" held by unlisted energy traders, national oil companies and the downstream segments of integrated oil firms, and the Japanese bank is left holding something like 4 percent of worldwide midstream and downstream debt. That's modestly ahead of its 2.7 percent share of global bank assets.

Where the Bodies Are Buried
Total debt held by energy sub-sectors, latest filings
Source: Bloomberg data
Note: Based on companies with public-market listings only.

Exposure to refiners in particular isn't something to be afraid of in these times of volatile energy prices. Indeed, given the way their profits often move inversely to those of the oil producers that supply their raw materials, there's a decent argument that refinery debt is a useful hedge against the upstream sector.

Rising Asia
Total debts of oil refining and marketing businesses, by region
Source: Bloomberg data
Note: Shows only debts held by companies with public-market listings.

As Gadfly has explained previously, Asia is short of crude so has a comparatively over-sized refining industry. Japan's refiners, which are scheduled to go through a government-brokered consolidation, are considered strategic for the nation.

More importantly, MUFG investors are now in a position to make their own judgments about its exposures. As bankruptcies multiply and concerns over banks' health increase, other lenders should follow its lead.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Christopher Langner in Singapore at clangner@bloomberg.net
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net