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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Big banks’ oil slick looks mostly fireproof

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Embattled bank chief executives can at least predict the first thing they’ll be grilled about on their next quarterly earnings call. With oil prices down by a fifth since the end of last week, investors will want to know how exposed lenders are to a possible wave of energy sector defaults. Luckily for the likes of JPMorgan Chief Executive Jamie Dimon and his European peers, there’s a relatively reassuring answer.


The bare numbers admittedly look worrying. Dimon’s company, for example, had about $42 billion of wholesale credit exposure to the oil and gas sector, or roughly 5 per cent of its total, at the end of 2019. That’s equivalent to more than a fifth of its common equity Tier 1, the main regulatory definition of capital. France’s Société Générale had roughly 20 billion euros of exposure, or 45 per cent of its CET1, while Dutch bank ING’s equivalent figure was 82 per cent of capital. Investors will fear bankruptcies eating into lenders’ safety nets, imperilling shareholder payouts. The Thomson Reuters United States and European banks indexes are down 8 per cent and 13 per cent respectively since March 5.


Yet the figures need a few caveats. Big banks have shied away from extending too much credit to highly leveraged drillers in the Permian basin, who are most at risk from low prices. More than half of JPMorgan’s oil and gas exposure is rated investment grade. Its credit losses were manageable last time energy prices tanked, peaking at $222 million in 2016, or 0.6 per cent of total oil and gas exposure.


It’s a similar story in Europe. Just 11 per cent of ING’s 39 billion euro exposure to the sector is directly sensitive to commodity price swings, the bank says. That includes so-called reserve-based lending, where a loan is secured against undeveloped reserves of oil or gas. The rest is relatively boring — think revolving credit facilities for Royal Dutch Shell. French banks’ portfolios are probably similarly skewed towards providing general corporate funding for oil majors like Total. Jefferies analysts reckon less than a fifth of Credit Agricole’s gross exposure relates directly to commodity price swings.


That’s not to say that Dimon and his peers can rest easy. Investors will be hyper-sensitive to even modest bad-debt charges at a time when global growth risks grinding to a halt because of the coronavirus. The same goes for potential losses on banks’ trading books from holding the other side of hedges protecting drillers from falling oil prices. But wider macro risks should play a bigger role in investors’ thinking than energy price shocks, since banks’ large oil spills look mostly fireproof. — Reuters


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