Energy Lending To Hurt Bank Stocks Amid Plunging Oil Prices
Zacks Investment Research | Mar 25, 2020 08:57AM ET
Since the breakout of the novel coronavirus in China, oil prices have been sliding. The outbreak, which has led to travel restrictions and lockdown in most countries, has impacted demand for fuel.
Oil prices tumbled further as Saudi Arabia initiated a price war and boosted its oil production significantly in retaliation to Russia’s refusal to lower its crude production. Hence, oil has been witnessing one of the most vicious selloffs in history, with oil prices trading in the low 20s. Thus, the rippling effects of the plunge in oil prices are expected to hit the banking sector.
This is because, with the plunge in oil prices along with reduced demand, energy companies — to which banks extend loans — will not be able to make payments. This will lead to an increase in defaults, thus, forcing banks to raise their loan loss provisions as credit quality of the loans made to the energy companies will deteriorate. This, in turn, will likely hurt banks’ profitability to some extent in the near term.
In 2016, sustained volatility in oil prices had adversely impacted earnings of banks, which had considerable exposure to the energy sector. Profitability of major companies, including JPMorgan (NYSE:JPM) , Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) , was hurt because of the higher provisions created to cover the soured loans of the energy companies. Several small and mid-sized banks like Zions Bancorporation (NASDAQ:ZION) , BOK Financial Corp. (NASDAQ:BOKF) and Regions Financial Corporation (NYSE:RF) faced a similar situation.
In addition to facing the impact of falling oil prices, banks are suffering from other concerns. The Federal Reserve’s accelerated move to Zacks Investment Research
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