Global Credit Research – 18 Feb 2015
New York, February 18, 2015 — There are no imminent threats to the creditworthiness of rated banks globally from the recent sharp fall in the price of oil, but direct and indirect exposures to the price decline could lead to asset-quality and earnings deterioration in several banking systems if prices remain depressed for a prolonged period, says Moody’s Investors Service.
On balance, lower oil prices will broadly support bank creditworthiness globally given lower input costs and improved debt-service capacity for corporate and household borrowers; however, the ultimate direction and dimension of these factors will vary across regions, countries and individual banks. The new report, “Lower Oil Prices Pose No Imminent Threat to Bank Creditworthiness,” is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
“Overall, we don’t expect immediate material negative effects on global banks’ fundamental creditworthiness as a result of the recent sharp fall in the price of oil. Banks have seen broad improvements in asset quality and capitalization, which should provide them with sufficient resources to absorb any oil-price-driven loan quality deterioration,” says Robard Williams, a Moody’s Vice President – Senior Credit Officer and author of the report.
Moody’s report highlights banking systems where the negative effects of the oil-price decline will be felt the most, which are predominantly in those countries that are net exporters of oil.
For the countries composing the Gulf Cooperation Council (GCC), lower oil revenues will put pressure on some governments’ ability to sustain current public expenditure levels, which play a critical role in the region’s economic growth and underpin the operating environment for banks. Although the current price of oil is below most GCC countries’ fiscal break-even point, governments in the region have large sovereign wealth funds that will help relieve any immediate impact on economic growth and maintain a supportive operating environment for banks. However, Moody’s notes that the Oman and Bahrain banking systems are the most vulnerable in this region, given high break-even prices, tighter fiscal positions and low reserve buffers.
Credit costs associated with Canadian banks’ consumer portfolios will rise, alongside those for their loan exposures to oil-related corporates, which account for 2% to 3% of Canadian banks’ total loans. In Latin America the fall in oil prices coincides with a more generalized decline in commodity prices, adding to pressures on region-wide growth. Colombia and Mexico are net oil exporters, and a protracted economic slowdown will negatively affect these countries’ banks.
For Europe, we expect the positive impact of lower oil prices on growth to be modest. Moreover, the drop in oil prices presents an additional hurdle for policymakers already facing low price inflation and weak growth. Two European banking systems, Norway and Austria, have more pressing issues with regard to their respective operating environments and the recent fall in the price of oil. For Norway, oil and gas account for more than one-fifth of economic output and two-thirds of exports. However, the country’s banks enter this new environment from a position of strength, having among the lowest non-performing loan and highest capital ratios in the region. For the Austrian banking sector, the primary source of risk from a prolonged drop in oil prices derives from the banks’ material exposures to Central and Eastern European countries and Russia where lower oil prices, among other issues, have driven a material weakening of the macroeconomic environment.
Russia is entering a recession and its economy and banking system face numerous challenges on top of the fall in oil prices. The banks’ funding, equity and, therefore, earnings profiles are in some instances weighted towards the performance of large corporates that operate in, or have exposures themselves, to the oil industry. Banks’ direct exposures to the oil and gas industry vary widely. For example, the four largest banks (accounting for 60% of banking system assets) report exposures that range from 2% to 17% of total loans.
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