In his recent Chatter Around The World post, Roadmap2Retire presented a snapshot detailing banks exposure to the energy sector. A timely piece with the spring borrowing base redeterminations around the corner. It was a little bit of a rude awakening since a nice chunk of my portfolio is posted in full color. Although I did comment on the minimal issues I had, like any good article it got me to consider multiple questions. Has the thesis changed since purchase. Am I losing any sleep? Is my investment at risk? Is the landscape different? What are my real issues with the master list? Can I quantify the risks? Let’s try to figure it out …
What are my real issues with the master list?
General consensus is that oil exposure of less than 2% will not expose a bank to undue hardship in the event of default. Some studies suggest a 10% exposure to defaults would be comparable to one year of losses. Now I can’t say I like the 10% scenario, but I can easily accept the 2% threshold. Heck, even the Canadian banks operate pretty successfully at 2% or less.
So placing a 2% floor reduces the master list by 12 (to 26) and my portfolio exposure by 5 (to 11)
Is the landscape different?
Certainly the landscape has changed. I exited investing in the financial sector prior to the mortgage meltdown and only returned in March 2013. This crisis is post Dodd-Frank which requires banks to maintain higher reserves. Therefore I can see the argument for a 10% exposure. But since I do try to sleep well at night, my comfort level only allows me to raise the bar to 5%.
Raising the bar to 5% reduces the master list by 15 and my ‘undue’ exposure by 6.
With the last 5 I’ll address the question:
Has the thesis changed since purchase.
Independent Bank Group Inc. – this is the only one I would question. My thesis was they would be an acquisition target. Instead, they’ve been an acquirer. At a 5.1% exposure to energy, I’ll hold.
Comerica – this is the only SIFI (systemically important financial institution) remaining on the list. As the smallest of the SIFIs, my theory is that they’ll be a takeover candidate. Their recent earnings restatement has nothing to do with energy, so I’ll hold.
Legacy Texas – This one’s a little overstated as some of their syndicated loans were still on the books. I think it’s about 9% – still a little high – but the demographics of their primary customer base should equalize this over the next year or so. I’m acquiring on weakness.
Cullen Frost – their exposure is a little high for my taste but they have seasoned management who’ve experienced oils boom and bust cycles before. A part of their loan book is to other banks (higher quality loans) which (in my mind) offsets oil to a degree. They just got hit with a downgrade (A- from A) and added to their reserves. If sentiment turns against them (on no news during the redetermination period) I’ll be adding.
BOK Financial is an interesting one. Yes their exposure is high and their reserves are high. But they have a subsidiary operating in the “property sales and strategic advisory services” space (similar to PJT). So even with the recent downgrade (to BBB+) it is a speculative hold. I’ll reassess if their pending acquisition of Missouri Bank & Trust is rejected by regulators.
Most of these names are still serving their intended purpose. A couple require a little more oversight but overall I’m satisfied with their relevant performance. And the names on his list I don’t own? I haven’t encountered a compelling enough story to buy. Thanks R2R for the research motivation.