• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Energy

Avoid Banks With Big Energy Loans

Banks are just now starting to reserve for the possibility of several defaults from their energy portfolios.
By TIM MELVIN Apr 20, 2016 | 02:00 PM EDT
Stocks quotes in this article: MSL, HBHC, BOKF, CFR, TCBI

It is a well-known fact that I am among the worst market timers in the history of the world. If I had to live or die on my directional market calls, there would be long, lush grass over my grave as I would have been long ago dead.

Fortunately, I figured this out very early in life and have resisted any urge to trade upon my hunches or careful interpretation of wiggles and squiggles on a chart. Perhaps some folks can do it. I cannot. What is amazing to me is that there are those out there worse than me. This lack of skill or even luck does not, however, deter them from making frequent calls. Last night as I was flipping between election results and baseball, I got a call from one of them.

I have known this individual for several decades and he fancies himself a contrarian of the highest order. While I am contrarian by nature, I also recognize that being contrarian just for its own sake can be expensive. Sometimes the current wisdom is actually pretty wise. Last night, my old friend was very excited about buying banks with high energy exposure, as post-Doha all the bad news was in and they had sold off to bargain levels. I tried to dissuade him, but I am sure he is buying away this morning.

We are not even in the first inning of energy-related bank loan problems. The pitchers are still warming up. Banks are just now starting to reserve for the possibility of several defaults from their energy portfolios. Bankers are still pretty calm when talking about their energy exposure. The stocks have sold off some, but they are not at the distressed levels we will see if oil really does stay lower for longer. The best way to avoid energy-related losses in the banking sector is simple. Do not buy banks with significant energy exposure right now. The losses could be large enough to destroy equity and cause even larger drops in the stock price.

MidSouth Bancorp (MSL) is a great example of a bank that looks like a bargain but is just too risky right now. The stock looks attractive to a bank bargain hunter like me at first glance. The bank is trading at 55% of book value and yields 4.28%. There has even been a little insider buying. However, a deep dive into the loan book shows it has $264.7 million of energy exposure in its loan portfolio. MidSouth has total shareholder equity of just $213 million, so lower-for-longer in oil prices could cause it to have to write down equity as losses are absorbed. We could see oil prices firm and the bank get bailed out by firm prices, but that's a very high-risk bet given the leverage inherent in the banking industry.

Moody's just downgraded four banks that have a similar situation. They lowered ratings on Hancock Holding (HBHC), BOK Financial (BOKF), Cullen/Frost Bankers (CFR) and Texas Capital Bancshares (TCBI). The downgrade press release said, "Moody's said the rating reviews for downgrade considered three broad factors. First, these banks hold comparatively large energy-related loan exposures when compared to their tangible common equity (TCE). Second, the prolonged period of low oil prices and Moody's expectation that prices will remain low for an extended period undermine the quality of the banks' energy-related loans. Third, to various degrees, these banks operate in regional economies where the energy sector contributes more to the local economy than the national average, exposing the banks to deterioration in their non-energy loan portfolios. "

It is not time to buy banks with energy exposure. That time will come and it will be when there are more FDIC investigators and examiners than oilmen wandering the halls of banks in the oil-producing regions. At least one or two of the banks will on the verge of insolvency and Andy Beall and Gerald Ford will be spotted in the corner talking to FDIC officials with calculator and checkbook in hand. Bankers will commute to work by bicycle to help them avoid ever thinking about fossil fuels again. When these things happen, we will begin to get interested in oil-exposed banks.

I am watching pricing in energy producing regions carefully. Not every bank in these areas lends to the industry, and given Wall Street's propensity for throwing the baby out with the bathwater, we may see some bargains created in states like Texas, Louisiana and Oklahoma. For now, I am taking a pass on any bank with a larger percentage of energy-related loans on the books.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Melvin had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Financial Services | Energy

More from Energy

See That Down the Road? It's the Big 'Green' Bubble, Ready to Pop

Jim Collins
Jun 24, 2022 1:30 PM EDT

Environmental, social, and corporate governance has created a monster and gullible investors should hit the brakes on their EVs and run from the Washington technocrats while they have the chance.

Weber's Rally Was Cooked Up By the Shorts and Something I Experienced First Hand

Jonathan Heller
Jun 24, 2022 10:00 AM EDT

It should be an interesting ride from here.

Will This Year's Energy and Commodity Trades Become Last Year's Tumbling Tech?

Helene Meisler
Jun 24, 2022 6:00 AM EDT

I can't remember the last time anyone asked me about Apple. No one cares.

Here's What You Need to Know About Investing in Energy

Jim Collins
Jun 23, 2022 1:00 PM EDT

The rudderlessness in DC has created an environment that's downright hostile to domestic exploitation of hydrocarbons.

Occidental Petroleum Could See Its Charts Improve as Buffett Ups His Stake

Bruce Kamich
Jun 23, 2022 8:03 AM EDT

The stock of the oil giant has been sliding of late but should receive a boost as the Oracle of Omaha buys more Oxy shares.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 08:55 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    The 10 personality traits of successful traders an...
  • 12:08 PM EDT STEPHEN GUILFOYLE

    Stocks Under $10

    As a Portfolio Name Agrees to a Merger, Here's Our...
  • 10:44 AM EDT PAUL PRICE

    My Very Best Pick for the Next 12 Months

    American Woodmark . It rarely gets better than th...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login