Standard Chartered Added Oil Refiner Debt Before Margin RoutBy and
Bank increased refinery debt 24% to $7.3 billion in 2016
Refineries facing pressure on margins as gasoline prices fall
Standard Chartered Plc, the U.K. lender reeling from billions of dollars of losses on soured energy loans, has increased lending to oil refineries just as companies across that industry face a slump in profit.
The London-based lender said Wednesday it had $7.3 billion of loans to oil refineries at the end of June, a 24 percent increase since the end of 2015. While Standard Chartered cited the industry’s “broadly steady” profit margins for the period, some of the world’s biggest oil producers have since reported that this metric has tumbled amid a glut of gasoline.
Investors cheered the lender’s drop in loan impairment charges Wednesday as a signal that it has moved past the worst of credit issues that peaked last year when Standard Chartered posted more provisions against bad loans than HSBC Holdings Plc, a bank four times its size. The increase in refiner lending shows risks remain even as Chief Executive Officer Bill Winters shrinks the bank’s overall commodities exposure.
“I’m not sure it’s the area where most investors would like to see them growing at the moment,” said Joseph Dickerson, an analyst in London with Jefferies Group LLC who has an underperform rating on the shares. “Hopefully they’re getting paid for the risk.”
Shares in Standard Chartered have risen 15 percent so far this year, the only major European bank to climb in 2016. Provisions for bad loans in the ongoing business were $1.1 billion for the first half of 2016, including $606 million in the unit that deals with energy clients, the bank reported Wednesday. That was less than analysts at Citigroup Inc. had expected and the stock climbed 4.2 percent Wednesday and another 5.5 percent at 12:35 p.m. Thursday.
“Since the start of 2016, we’ve seen a sort of stabilization in their impairment costs on the back of the ‘de-risking’ mantra,” said Filippo Maria Alloatti, a credit analyst at Hermes Investment Management Ltd. in London. “I’m surprised that they’ve started lending to the sector again.”
Oil refiners had benefited from a boom in so-called refining margins. This is the difference between what energy producers pay for crude oil and what they sell as refined gasoline, diesel and other products. As oil prices plunged, refiners were able to buy cheap crude and process it into relatively expensive gasoline and other petroleum products.
“The profitability of refiners is driven by gross refining margins and the margins held broadly steady during this period despite the volatility in crude oil prices,” Standard Chartered wrote in its report for the first half of the year. “We have selectively increased our exposure since year end to this subsector, in particular to good credit quality clients.”
Yet refining margins have tumbled since late May as over-production of gasoline in the U.S. created a glut that depressed prices for refined products. BP Plc, the third-biggest European oil company, said in late July the metric had slumped to the lowest in six years as it posted a 45 percent decline in profit for the second quarter. The London-based company said that the margins will remain “under significant pressure” in the third quarter.
BP isn’t alone. Statoil ASA, the biggest Norwegian producer, reported a surprise loss for the second quarter and CEO Eldar Saetre said that refining margins had fallen by almost half from a year earlier. Valero Energy Corp., the biggest U.S. refiner, has said it faced “weaker gasoline and distillate margins” in the period.
“We expect margins to remain poor throughout summer,” said Nevyn Nah, oil products analyst at Energy Aspects Ltd., a consulting firm in London. “Refineries overproduced when margins were strong, so we’re left with a very high product inventories right now, which is pressuring margins.”
Standard Chartered’s $7.3 billion of loans to oil refineries accounts for almost half of the lender’s $14.8 billion net exposure to “commodity-related sectors,” the report shows. Outstanding debts tied to this group have climbed 13 percent since December and are up from $13.5 billion since 2014, according to the report. Those loans represent about 6 percent of Standard Chartered’s total.
“It’s interesting to see that that’s an area where the bank feels it can get paid for taking incremental risk,” said Dickerson, the Jefferies analyst. “It seems to run contrary to the direction of refining margins.”
HSBC also said Wednesday that exposure to oil clients climbed by 7 percent from the end of last year to $31 billion. The same sector triggered loan losses of about $400 million in the first half.
Standard Chartered’s increase stands as a contrast to the bank’s approach to other kinds of energy debt since JPMorgan Chase & Co. veteran Winters joined as CEO last year. Standard Chartered’s exposure to commodity producers and firms that trade financial products tied to energy was $37.1 billion at the end June, down 32 percent since 2014.
Winters, who replaced Peter Sands as CEO, is seeking to undo an era of relaxed lending standards, in part by exiting and restructuring $100 billion of risky assets. Standard Chartered’s corporate and institutional unit has booked about $4.8 billion of impairments and restructuring costs since 2014. The $606 million in impairment charges the bank has added so far this year is “primarily” because of commodities, the report shows.
Still, some analysts are pleased at the increase in lending. As long as Standard Chartered is dealing with state-owned refiners and large corporations, the bank will be “fine,” according to Chirantan Barua, an analyst in London with Sanford C. Bernstein Ltd. who has an outperform rating on the stock.
“Standard Chartered is a trade bank and, as a trade bank, you cannot not work with the refiners,” said Barua in an e-mail. “It’s good that they’re stepping back in.”
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