Banks Could Get Hit Hard With Oil Prices Below $60 [CHARTS]

Brett Rabatin of Sterne Agee argues that the pullback in banks with energy exposure is overdone, and that several names in the sector offer good value. In his Industry Report dated December 15th, Rabatin says that unless oil prices stay below $60 for an extended period of time, most banks with significant energy exposure aren’t likely to face too much bad debt.

Rabatin does, however, see greater risks with oil prices dropping, and suggests sticking with issues with less energy industry exposure for the time being. He notes: “Our view is to stay involved or look at the names we are more comfortable with from a credit perspective and with less servicing industry exposure – BOK Financial Corporation (NASDAQ:BOKF), Cullen/Frost Bankers, Inc. (NYSE:CFR), Comerica Incorporated (NYSE:CMA), Texas Capital Bancshares Inc (NASDAQ:TCBI), ViewPoint Financial Group (NASDAQ:VPFG), and Independent Bank Group Inc (NASDAQ:IBTX).”

Oil prices staying below $50 could create cash flow problems

In past reports, Rabatin had argued energy lending credit quality would not likely be an issue with oil prices remaining above $60, but that energy lending growth was likely to be very low over the next several quarters. With oil now sinking below $60 a barrel, the SA analyst increases the possibility a persistence of lower prices  will cause some cash flow issues at the vast majority of lenders in the universe.

Rabatin offers a bottom-line perspective on the sector: “If lenders like BOKF might have a couple credits that could go to NPA status, it is not likely the rest of the industry will be immune. The group needs oil to stabilize and move higher for valuations to improve, noting the “Texas bank premium” is all but gone excluding a few names that are typically more expensive.”

Detailed sector recommendation

Earlier SA reports had highlighted the possibility that the Texas bank premium might be at risk, especially if lending growth slows or energy negatively impacts the state economy. Rabatin notes that this process is already underway, related to negative sentiment on the state economy and increased concerns about credit quality.

He concludes by recommending several issues in the Texas banking sector, and also noting a few stocks to avoid. “With a continued pullback in the group, at this point we are highlighting BOKF (a recent upgrade), Prosperity Bancshares, Inc. (NYSE:PB), Independent Bank Group Inc (NASDAQ:IBTX), Comerica Incorporated (NYSE:CMA), and MidSouth Bancorp, Inc. (NYSE:MSL) as opportunities at present levels. There could be others. We are cautious on Zions Bancorporation (NASDAQ:ZION), HSBC Holdings plc (ADR) (NYSE:HSBC), and IBERIABANK Corp (NASDAQ:IBKC) – not necessarily in expecting further price declines, but that caution on credit/servicing exposure may keep those names from benefiting assuming some buying from value investors occurs at current levels.”