Are Banks at Risk from Falling Energy Prices?

European banks are just beginning to report their 2015 results, and in the longer term, we think cumulative losses due to falling energy prices could be a bigger issue than in the US

Erin Davis 4 February, 2016 | 9:55AM

We've taken a close look at banks' energy exposures and potential losses, and see both good news and bad news for investors. First, the good news; for most banks, we think the losses will be manageable. And now the bad news; nearly all banks are under-reserved and several could be facing capital shortfalls in a worst-case scenario.

Will energy losses be merely painful, or pose a serious risk to capital?

We use the bond markets to proxy what total losses could be. The S&P 500 Energy Corporate Bond Index is down about 15% peak to trough, and the Bloomberg USD High Yield Corporate Bond Energy Index is down about 30%.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Barclays PLC91.55 GBX-1.42
Lloyds Banking Group PLC24.72 GBX0.57
Standard Chartered PLC336.80 GBX-2.66

About Author

Erin Davis  is a senior banking analyst for Morningstar.

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