Troubles in the energy sector could undermine years of improved credit quality with shared national credits.

Results for this year's shared national credit exam have yet to be released, but some bankers have recently been discussing a handful of credit downgrades as persistently low oil prices continue to wreak havoc on certain clients. For instance, troubled assets will likely rise after five years of decreases, industry experts said.

Banks, by and large, should be able to weather what should still be a relatively small uptick.

"I'd be surprised if we don't see classified loans move up because of what has happened in the energy sector," said Jeff Davis, managing director of financial institutions at Mercer Capital. "Regulators are conservative in their view, and not every bank will agree with how it is graded, but the bank still has to act accordingly."

Commercial-and-industrial loans rose by almost 12% last year, compared to 2013, with much of the growth tied to areas such as oil and gas extraction, based on the Office of the Comptroller of the Currency's semiannual risk perspective. Last year's shared national credit exam found that credit quality at U.S. banks improved slightly.

Energy loans tend to be bigger and syndicated, compared to loans in a number of other industries, so many of them would be reviewed through the shared national credit exam, said Steve Moss, an analyst at Evercore.

The price of crude oil dropped significantly between mid-2014 to early this year because of decreased demand and increased production in the U.S. and elsewhere, according to the OCC's report. Since then, lenders have been dealing with credit cracks that are also popping up in shared national credits, experts said.

"The exam was more benign last year because there weren't as many concerns," Moss said. "Now you have signals from regulators that they would be aggressive in leveraged loans and scrutinizing credit in general, combined with the decline in oil."

Representatives for the OCC, Federal Deposit Insurance Corp. and Federal Reserve Board all declined to comment since the shared national credit exam is ongoing.

Banks have already received individual results from their exams, prompting downgrades in a number of portfolios, said Brian Klock, an analyst at Keefe, Bruyette & Woods. For instance, Comerica's stock price fell after the $69 billion-asset company released second-quarter earnings that revealed some issues with "energy related loans and the results of their syndicated loans," Klock added.

The Dallas company's loan-loss provision quadrupled from a year earlier, to $47 million, mainly because of its energy book. The energy sector makes up nearly a third of Comerica's shared national credits, Peter Guilfoile, the company's chief credit officer, said during a recent conference call to discuss quarterly results. And roughly 90% of Comerica's energy book involves shared national credits.

"We do expect, though, for there to be some continued migration in the portfolio as our borrowers continue to adjust to this lower price environment," Guilfoile said. "We also expect that we're going to continue to see pay downs on our energy loans, which is going to have an offsetting effect to the additional migration."

The provision at Texas Capital Bancshares in Dallas tripled from a year earlier, to $14.5 million, as it tried to guard against additional risk in its energy book. The $17 billion-asset company said it downgraded two shared national credits tied to energy; those relationships made up more than half of its $55 million increase in nonperforming assets during the second quarter.

"We think it's prudent, both for the energy downgrade trend and for the overall economy, to estimate our provisioning of this size for the balance of the year," Keith Cargill, Texas Capital's president and chief executive, said during the company's quarterly conference call. "It could change. We could have some things develop that are more clearly to the positive. We just don't want to be overly optimistic at this point."

Issues also extend to companies based outside of Texas.

Roughly 45% of total commitments within the corporate banking group at Regions Financial in Birmingham, Ala., are shared national credits, executives said during its second-quarter conference call. The business, a focus of the $122 billion-asset company in recent years, is still viewed as a critical component of future revenue growth.

Still, loan growth and the results of the shared national credit exam prompted management to increase the loan-loss provision by 80% from a year earlier, to $63 million, Grayson Hall, Regions' chairman and chief executive, said during his company's quarterly call.

"We're continuing to monitor our energy portfolio and have experienced some downward risk breeding migration," Hall said. "If oil prices remain at low levels for an extended period of time, additional migration is likely."

While increased credit issues are expected, most industry observers believe they will remain manageable.

U.S. banks held roughly 43% of shared national credit loan commitments but roughly 13% of the classified assets, according to last year's aggregate exam results. Nonbanks, such as securitization pools, hedge funds, insurers and pension funds, held roughly 22% of shared national credit commitments but nearly three-fourths of classified assets.

"I absolutely expect to see an increase in criticized and classified assets, partly because of energy, but also because of softening underwriting standards," said Aaron Deer, an analyst at Sandler O'Neill. "But I'd say the risk or exposure among the banks will probably continue to be relatively modest in the overall picture."

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