Junk-rated and oil and gas loans worry U.S. bank regulators

Thu Nov 5, 2015 8:40pm EST
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By Dan Freed and Lynn Adler

(Reuters) - Banks' exposure to junk-rated companies and the oil and gas sector remains high, according to an annual report on loan quality by U.S. bank regulators released Thursday.

The regulators gave a negative classification to $372.6 billion out of $3.9 trillion in loans impacted by the review, or 9.5 percent of the loans. Classified loans increased 9.4 percent from a year earlier.

While regulators cited progress by banks in improving underwriting practices, they complained in a press release with the report of "persistent structural deficiencies found in loan underwriting."

The report could be an early sign of a shift in the credit cycle toward more conservative lending because of stress among some borrowers.

Criticism of loan quality in last year's report focused on loans to junk-rated companies. This year's report added worry about oil and gas loans. So called "classified" oil and gas loans - ones that received the three most negative ratings of "substandard," "doubtful," and "loss" - surged to 15 percent from just 3.6 percent a year ago.

"Aggressive acquisition and exploration strategies from 2010 through 2014 led to increases in leverage, making many borrowers more susceptible to a protracted decline in commodity prices," the release stated.

The review could force banks to scale back loans to energy companies. In September the Office of the Comptroller of the Currency, which conducted the review with the Federal Reserve Board and the Federal Deposit Insurance Corporation, met with banks over the impact of fallen commodity prices on the ability of borrowers to repay loans.

The "shared national credit review" covers loans made by at least three or more federally regulated institutions, chiefly banks. Thursday's report used data banks provided between Dec. 31, 2014 and March 31, 2015.   Continued...

A pump jack operates at a well site near Guthrie, Oklahoma September 2015.    REUTERS/Nick Oxford