One of the reasons I spend so much time explaining why events are unfolding and referring back to columns I've previously written is that everything is connected -- and understanding these connections is paramount to successful investing. That's especially true following "shock" events, like oil's 70% decline over the past 18 months.
Since I last addressed oil's likely impact on capital markets last November, petroleum prices have declined by another 40%. I looked at tumbling energy prices' impact on big banks in my November column, but this time, I'd like to analyze how crude's collapse is affecting the other end of the spectrum -- small regional banks.
Let's look at four regional banks in Oil Country: BOK Financial (BOKF), Cullen/Frost Bankers (CFR), Hancock Holding Co. (HBHC), and Texas Capital BancShares (TCBI).
All four predominantly operate as business banks, with commercial-and-industrial loans (C&I) representing 30% to 40% of the dollar value on each institution's loan book. And all four have experienced substantial, accelerating increases in the dollar value of their nonperforming C&I loans over the past year.
Not surprisingly, they've also seen their stock prices fall. BOK is down 23% since oil's descent began in June 2014, while Cullen has lost 38%, Hancock has given up 32% and Texas Capital has dropped 35%.
But what's more important is what's happened to these stocks since oil prices fell 40% in the just past three months. Each bank's stock price started from a lower base then, but BOK has fallen another 31% from there, while Cullen has shed 33%, Hancock gave up 22% and Texas Capital lost 43%.
In fact, I suspect the only reason these stocks haven't fallen even more is that each bank is well-capitalized, has been aggressively restructuring nonperforming loans and has successfully avoided charging off bad debt (so far).
This is very similar to the approach that Wells Fargo (WFC) took during the 2006-10 U.S. housing bust. Because WFC owned and serviced most of its mortgages, the bank had the ability to restructure loans with borrowers directly. It wasn't handicapped by the mortgage-backed-security (MBS) covenants that many other lenders had to deal with.
Similar actions by the four banks above has prevented oil's "contagion" from spreading so far, although this might simply be a form of "extend and pretend" that will ultimately fail.
But even more impressive is the fact that these banks haven't had to increase their access to Federal Reserve funds via money-center banks. However, that would be the next logical step if oil prices and/or demand don't rebound in the foreseeable future.
I don't advise taking any positions in these four stocks, but I think it's important for investors to monitor them. That way, you'll have an early indication as to whether oil-sector loan defaults will "metastasize" into the kind of contagion that broadly affected capital markets when mortgage defaults rose during the 2006-10 housing crisis.
I'll do a follow-up column soon to address oil's probable impact on money-center banks, as that's where "the buck" will ultimately stop. Big banks will end up taking a large percentage of losses if oil-sector loan defaults keep growing.