TROUBLING: Loans to oil companies are edging towards default

Banks have an energy problem.

In a note on Friday, JPMorgan’s Vivek Juneja broke down the results from the 2015 Shared National Credits exam, which is a Federal Reserve initiative to review and classify large syndicated loans.

The review captures any loan bigger than $US20 million that is shared by three or more supervised institutions. The SNC provides insight on so-called classified loans, or loans with unpaid interest and principal outstanding that are in danger of defaulting.

According to the results of the SNC, classified loans to oil and gas companies jumped four-fold.

The report said: “O&G classifieds rose to about 12% of total O&G commitments, well above the 5.3% ratio of classifieds for all other loan commitments. Put another way, O&G classified loans now account for 15% of total classifieds, up from 3.6% a year ago.”

That means around one in seven loans to oil and gas companies are edging towards default.

“What is also troubling is that the regulators noted a general lack of protective covenants in reserve based loans which will further exacerbate the situation,” Juneja writes.

Per his note:

It is likely to get worse still for banks. The SNC review was done in the second quarter, and there have been further credit rating downgrades, defaults and oil price drops since then.

“Hence, we would expect the levels of classifieds to increase sharply further in the next SNC review and further increase in provisions at banks more exposed to O&G loan SNCs.”

As Business Insider’s Jon Marino reported in September, banks are starting to pull back from lending to energy companies.

In September, banks were basing their lending decisions on an oil price of $US48 a barrel, down from $US77 a barrel last year. That means energy companies are not going to be able to borrow nearly as much as they used to.

Not to mention the pressures banks are getting from regulators.

Regulators from the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corp. reportedly met with banks in September to discuss reserve-based lending requirements.

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