Crude oil prices began to slip this summer, and the sell off accelerated into a rout over the last few weeks as OPEC nations could not agree on a production cut. Oil prices have dropped to below $70 per barrel as of early December, and analysts say that there is little chance of a significant move back up in the short-term.
A December 2nd report from equity research firm Sterne Agee argues that the ongoing sell off in Texas banks related to the recent steep decline in oil prices is overdone, and that a bounce back is likely, at least in selected issues. Analyst Brett Rabatin believes that oil prices would have to drop all the way to $60 per barrel and stay there for several quarters before it would lead to credit risks for any of the banks covered by Sterne Agee.
Sterne Agee recommendation on Texas banks
Although he prefaces his recommendation with a note of caution, Rabatin highlights a number of Texas banks who he feels have become oversold during the recent pullback in the sector. “With the pullback in the group overall, we are most constructive on Prosperity Bancshares, Inc. (NYSE:PB), Comerica Incorporated (NYSE:CMA), and Independent Bank Group Inc (NASDAQ:IBTX) in Texas. Texas Capital Bancshares Inc (NASDAQ:TCBI) has also experienced a meaningful decline the past week, as has BOK Financial Corporation (NASDAQ:BOKF). Hilltop Holdings Inc. (NYSE:HTH) has not pulled back but stands out as attractive and less at risk in our view.”
M&A activity might actually pick up
Rabatin also argues that the current lower oil price environment could actually lead to an increase in mergers and acquisitions activity in the state as bargain hunters emerge. He notes: “…we have heard a lot of lenders the past two weeks talk about companies still making money for the near-term but reducing budgets, reducing debt, and pulling back. Texas still looks good, but it clearly being the place to be could reduce out-of-state interest in being a buyer of franchises in the state. Nonetheless, we have heard of increased activity potentially happening in the $500 million to $1 billion range. Oddly enough we are fairly bullish on M&A activity increasing despite all the market concern about energy.”