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Bank Credit Exposures: Building the Mosaic One Loan at a Time

Companies and Markets

By Sean Ryan  |  April 1, 2020

A bottom-up, loan-level analysis of banks’ commercial loan exposures offers some valuable insights into the riskiness of C&I loan portfolios, beyond what can be gleaned from top-down disclosures of aggregate industry exposure.

This is perhaps obvious, as is the impediment to such analysis that banks are not generally in the habit of disclosing details about specific customer relationships. However, some of their largest borrowers do precisely that. Specifically, publicly-traded companies regularly disclose useful information about term and revolving loan relationships with particular banks. Looking at these loans can help bank investors get a better handle on bank credit exposures by industry.

Unfortunately, the list of industry exposures that require unusual scrutiny has gotten very long, very quickly. The oil and gas industry may be especially interesting, however. The Saudi-Russian price war was weighing on oil prices even before the coronavirus turned global markets into an omnishambles. On the cusp of spring redeterminations, WTI is trading in the mid-$20s as of this writing or less than half the level that prevailed at the time of the 2019 fall redeterminations.

Regions Financial is a well-managed superregional bank with above-average exposure to the oil and gas industry as one might expect of a large bank with a branch network that extends across the Gulf coast. A review of Regions’ publicly disclosed (by borrowers) credit agreements aggregated by industry turns up a total of 10 top energy companies; five upstream and another five in downstream and midstream (and another eight in hospitality services, which is unrelated to energy but another area of particular interest to investors at present). Notably, there are another 57 credit agreements with real estate companies, any of which may entail indirect exposure to industries or geographies of interest.

Term and Revolving Credit Agreements

An examination of those individual credit agreements can help give a sense of the types of exposures a bank is willing to hold. In the case of Regions Financial, here are the 10 energy sector credit agreements:

Energy Sector Term and Revolving Credit Agreements NEW

Reviewing this list of companies, one notes several oilfield services companies. Given the small sample size, investors ought not to assume based on this sample that it is must be representative of Regions’ overall energy loan book. It is the sample we can see, however, and so as a rule, some Bayesian updating seems in order.

In the case of Regions, this sample appears broadly consistent with the comments of CEO John Turner at a recent investor conference, at which he noted that Regions’ oilfield services exposure is about $400 million in outstandings, out of total energy outstandings of just over $2 billion. Mr. Turner also noted that about 40% of the services outstandings are criticized or classified (regulatory categories for loans where all may not be going to plan). Shareholders are surely gratified that both the services and aggregate figures are each about $1 billion lower than in 2014, during the last sharp oil downturn.

It bears noting, however, that Mr. Turner made those comments on March 10, 2020. A lot has changed in the few weeks since then and daily announcements of companies drawing down their credit lines are a reminder that outstandings can spike up at particularly inauspicious moments. Therefore, it can also be worthwhile to drill down on some of the terms of the individual energy credits, particularly the financial covenants.

Selected Financial Covenants Energy Sector Credit Agreements NEW

In the case of these credits to public companies, investors may be able to make informed forecasts about the probability and timing of breaches. Considering current economic conditions, lender forbearance may be broad and deep, at least at first. But the more detail investors understand about loan portfolios, the better they can understand and discount various contingencies.

Each credit in a troubled industry is a case study that makes investors’ understanding of the trouble a bit more robust. Especially with the historically high level of uncertainty in the markets, this additional line of analysis may raise more questions than it answers, but they are better questions than might be asked without this data. Are these credits representative of the broader portfolio? If not, why not? Are these credits we can see more or less risky than others due to the borrower’s size? Geography? Capital structure? Business mix? Other idiosyncratic factors? In short, it helps investors deduce which pieces of the mosaic they are missing.

Even with regulatory relief on CECL, the oil and gas industry looks to remain among banks’ riskier exposures. Loan-level analysis of these exposures can augment investors’ understanding of banks’ risks and help inform questions for bank executives in first quarter earnings calls and the subsequent conference season.

View sample credit exposure reports for 12 large banks

Sean Ryan

VP, Principal Content Manager

Sean joined FactSet in 2019 and is based in Norwalk CT.