WASHINGTON – Delinquencies in loans related to the energy sector will continue to increase, but banks have taken actions to limit the losses and are still lending to other markets, according to a report issued Monday by the Federal Reserve Board.
The agency’s quarterly Senior Loan Officer Opinion Survey indicated that bank loan officers are pessimistic about energy loans but that such lending has not dragged down commercial and industrial lending overall.
“The majority of both domestic and foreign banks reported that they expect delinquency and charge-off rates on loans to firms in the oil and natural gas drilling or extraction sector to deteriorate somewhat over the remainder of 2016,” the survey said. “At the same time, the majority of both domestic and foreign banks reported taking a variety of actions to mitigate loan losses over the past year.”
More than half of responding banks – particularly large banks – said that they expected the loans in their energy portfolio to underperform for the remainder of 2016. Small and midsize banks were more likely to report that they expected their loan performance to remain the same.
However, banks have managed the risk posed by the underperformance of the sector by limiting or tightening new lending or lines of credit, setting aside additional reserves and by renegotiating the terms of their outstanding loans.
Nearly 70% of responding banks said the poor performance of the sector was not affecting their decisions to make other types of C&I, commercial real estate or consumer loans. More than 75% said they were not limiting their exposure to the market by using swaps or other derivatives contracts. The survey also found that a vast majority of domestic banks surveyed placed their overall energy loan exposure to under 5% of total lending portfolio, while a majority of foreign banks surveyed placed their exposure at over 5%.
Banks had reported as early as last year that they expected energy loan performance to slacken, but likewise indicated at that time that they believed corrective measures would keep the downturn from affecting broader credit availability.
The survey asks loan officers certain questions about their lending and underwriting activity, but also generally includes so-called “special questions” that highlight officers’ thinking on areas of particular interest to the Fed. The current edition of the survey included two sets of special questions, one on energy lending and the other on CRE lending.
The survey found that respondents had tightened CRE lending standards somewhat from the previous survey, though demand in the first quarter had strengthened. Banks noted that while the volume of CRE loan origination had increased, the securitization of those loans had decreased over the same period.