The Shared National Credit, aka SNC, released a report today on the risk of loans in the highest asset and most complex credits shared by multiple financial institutions and found that more loans are in trouble in many sectors, including oil and gas.
The review assessed a negative classification to $372.6 billion out of $3.9 trillion in the loans studied, or approximately 9.5% of the loans, an increase from 9.4% in the last year. Overall SNC commitments increased a whopping $518.3 billion to a total of $3.9 trillion, an increase of 15.3% from 2014.
Classified commitments and credits received a special mention for increasing $31.9 billion from the previous year, or 9.4%, from $340.6 billion to $372.6 billion. Substandard dollar volume rose 18.5% from the previous year, primarily due to a decline in oil and gas commitments which represented 5.8% of the SNC portfolio. This potential weakness could lead to further decline if uncorrected.
In a press release, the SNC cited, “This year’s review found that banks are making progress in aligning their underwriting practices with the leveraged lending guidance issued by regulators in 2013. However, the review highlighted continuing gaps between industry practices and the expectations …The persistent structural deficiencies found in loan underwriting by the agencies warrant continued attention.”
The report also expressed concern about certain oil and gas loans and referred to them as doubtful, substandard, and even loss. The number of these types of loans increased almost five fold to 15% in 2015, up from only 3.6% in 2014. “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.
Thursday’s report uses bank data provided between Dec. 31, 2014 and March 31, 2015 and looked for data in loans that was similar to the risks in loans that brought about the mortgage crisis. This includes a company’s ability to pay back at least half of the total debt over five to seven years being ranked favorably, and companies whose debt levels were more than six times their earnings before taxes, interest, amortization, and depreciation being ranked negatively.
The press release went on to say, “Because of the growing volume of special mention and classified commitments, as well as the significant growth in the leveraged lending portfolio, the agencies will continue to monitor in particular the associated underwriting and risk-management processes in the leveraged lending and oil and gas sectors.”
The SNC review was prepared by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency.
To read the entire review, click here.
Lilia Fabry is the owner of MPP Freelance, a writing and web design firm in Houston, TX.