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Decline in loan demand from energy companies likely to hit US banks

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 24, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - The oil price plunged on Monday to hit 11 year low. Oil price fell 2 per cent and dropped to $36.05. The slump in oil price in the last one year is largely the result of an over-supply sparked by OPEC’s market strategy. This slump has hurt major economies of the world. To begin with lower oil prices have hindered inflation growth in many countries causing the central banks to keep interest rates at record low levels. The central banks’ objective is to spur demand and in the process raise prices. However, in the process savings has been hurt. Investors started moving towards more volatile stock markets in hope of getting better returns on their investment.

    How oil slump will impact loan demand?

    Slump in oil prices hurt the energy companies, whose sagging profits have called for measures to slash spending. They have laid people off. This in turn affected employment rate. The spending capacity thus came under pressure as people lost jobs and even wages were slashed. Given people bought less goods, inventories increased. Businesses in the process of offloading unsold goods did not expand activity. Thus manufacturing activity suffered. Number of new orders fell. Overall corporate profits suffered. Poor activity environment this affected the need for more capital.

    Energy companies also reduced investment s for exploration and oil production. Drilling projects which have been scaled back has affected overall activity in the energy sector. These factors have weighed on loan demands of energy companies. This has in turn hurt the US regional banks which lend out to energy companies. John Pancari, analyst at Evercore opined regional banks will suffer from a decline in loan demand if oil prices stay below $70 a barrel.

    Banks in the US particularly in regions where a considerable part of the GDP is linked to the energy industry, witnessed lag in broader economic activity given the employees of energy firms and other related businesses are affected. The banks such as the Cullen/Frost Bankers and Hancock Holding might have a lot to lose as energy loans constituted 15% and 13% of their loan portfolios respectively in Q3.

    Contrary views prevail

    This is however not the only view prevalent in the market. Some analysts refute the argument that loan demnad from energy companies will suffer on account of low oil prices. Joseph Crivelli, investor relations director for BOK Financial, believes there could actually see a rise in loan demand contrary to popular belief. He is of the opinion that energy firms with less cash flow will likely need to borrow given their lower profits will hinder running of operation. He feels the pullback in oil prices will not have any material impact on the activities as he said that “A lot of our borrowers hedge their oil and gas exposure out to 12 or 24 months”.

    Crivelli is also optimistic that the lower oil prices will ensure “a more rational lending environment now,” given that opportunistic lenders, who flocked to the markets at the time when oil prices were high, will leave. “We saw a lot of competitors leave the market the last time oil prices dipped in 2008, 2009,” Crivelli noted.
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