The recent uptick in oil prices seems to have eased concerns about banks' energy exposure, at least temporarily.
On earnings conference calls Tuesday, two of the country's top lenders to oil and gas firms — Comerica and Regions Financial — fielded only a handful of questions about the depths of their vulnerability. Just three months ago, when oil prices were hovering around $30 a barrel, energy was all analysts wanted to talk about.
So what's changed?
Most notably, prices have climbed to about $45, improving borrowers' cash flow and, at least for now, reducing their risk of default. Banks have also substantially reduced their exposure to energy loans in recent months. At Regions, total loans to energy firms declined by 12%, or $324 million, between March 31 and June 30. Comerica's total declined 11% over the same three-month period.
That's not to say banks are out of the woods. Energy prices, while stabilizing, are still at below break-even levels for most oil and gas producers, so the risk of bankruptcies — and loan defaults — remains high, said Dallas Salazar, the chief executive of Atlas Consulting in Austin, Texas. Indeed, despite the improving credit picture, Regions, Comerica and other banks added to their reserves in the second quarter and all said they will continue to do so for the foreseeable future.
"The visibility for better prices is higher in the second quarter than it was in the first quarter," Salazar said. "But it becomes stressful [to banks] if we are still at this pricing a quarter from now. If we are still at this pricing two quarters from now, they'll need to [prepare for] more losses."
Largely pleased with the Comerica's and Regions' efforts to manage their energy exposure, analysts on Tuesday focused the bulk of their attention on two other issues: loan demand and expense management.
Though it reported strong growth in consumer lending, the $126 billion-asset Regions is under some pressure to boost commercial lending. The bank's loan-to-deposit ratio is at a historically low 84%, and Chairman and CEO Grayson Hall said weaker demand for commercial and industrial loans is among the reasons why.
"A lot of the growth" at other banks "has been at the higher end of the commercial [market] and into the corporate space," Hall said. "But when you look at the middle-market C&I, we're seeing a lower level of demand to support capital spending." He added, too, that he has "yet to see small-business owners really return to the market with confidence to invest and expand."
For the quarter, Regions, of Birmingham, Ala., reported a profit of $259 million, down 4% from the same period last year. Strong gains in consumer lending were largely offset by higher expenses and increased provision for loan losses tied to energy credits.
Regions' shares fell more than 3% on Tuesday, and some analysts attributed the decline to poorer-than-expected expense control.
Still, in a research note, Sandler O'Neill analyst Stephen Scouten said that the results were in line with expectations. He added that the decline in overall energy-loan balances has "significantly helped the optics for Regions."
Dallas-based Comerica reported earnings of $103 million in the quarter, a decline of 23% year over year. The company attributed the decline to restructuring costs associated with an efficiency drive it has dubbed Gear Up. Its goal is to reduce overhead by roughly $160 million a year through a combination of staff cuts, branch closures, technology improvements and other measures. The $70.7 billion-asset bank has also set a goal of increasing revenue by $70 million a year by expanding its product offerings, ramping up merchant services offerings and deepening relationships with middle-market customers.
The company plans to eliminate 9% of its workforce and close about 40 of its branches. In an interview, Comerica Chairman and Chief Executive Ralph Babb said that job cuts will begin this quarter and that many will come at the middle-management level. Branch closures will take place later this year and into next year.
"We are focused on looking at where are resources are and what kinds of returns we are getting," he said.
On the earnings call, Babb said that management would provide quarterly updates on Gear Up's progress. He also reiterated earlier statements that the bank would consider selling itself if it is in the best interests of investors.
"As I have indicated previously, our board and management team are committed to evaluating all opportunities to enhance shareholder value and doing what is in the best long-term interest of our shareholders," he said. "If there are strategic alternatives that are realistic, achievable and will maximize shareholder value they will be fully considered. We know we must earn our right to remain independent."