By Jeff Bater
May 2 — Banks are tightening lending policies on companies in the energy sector and restructuring loans, the Federal Reserve found in a survey released May 2.
In its quarterly report on bank lending practices, the Fed included responses by lenders to special questions about credit to firms in the oil and natural gas drilling or extraction sector.
Regulators are closely watching banks' exposure to falling oil prices . Most U.S. banks that made loans to energy firms indicated that such lending accounts for less than 5 percent of their outstanding commercial and industrial (C&I) loans, according to the Fed's April 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices.
In contrast, most foreign banks surveyed reported that loans to firms in the sector account for more than 5 percent of their outstanding C&I loans.
The majority of both domestic and foreign banks reported that they expect delinquency and charge-off rates on loans to firms in the oil and natural gas drilling or extraction sector to deteriorate somewhat over the rest of 2016, the Fed said.
“At the same time, the majority of both domestic and foreign banks reported taking a variety of actions to mitigate loan losses over the past year, including tightening lending policies on new loans or lines of credit made to firms in this sector, restructuring outstanding loans, requiring additional collateral, and setting aside additional reserves for a potential increase in loan losses,” the report said. “A significant percentage of banks also reported enforcing material adverse change clauses or other covenants to limit draws on existing credit lines to firms in this sector, tightening lending policies on new loans or lines of credit to firms in other sectors, and hedging the risks arising from declines in energy prices through derivatives contracts.”
Some banks indicated an energy sector spillover onto credit quality of loans made to businesses and households that are located in regions dependent on that industry.
“In particular, a significant net fraction of banks reported that credit quality deteriorated for both auto loans and non-energy-sector C&I loans somewhat over the past year,” the Fed report said. “Furthermore, moderate fractions of banks indicated that CRE (commercial real estate) loans, consumer credit card loans, and consumer loans other than credit card and auto loans made to businesses and households in these regions also deteriorated somewhat over the past year.”
The survey of domestic and foreign banks addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. Participating lenders received the survey on or after March 29, and responses were due by April 12.
Results of the survey showed that some banks tightened their standards on C&I loans and CRE loans over the first quarter of 2016. The results indicated demand for C&I loans had weakened, and that demand for CRE loans had strengthened during the first quarter.
As for loans to households, banks reported having eased lending standards on most types of residential real estate (RRE) mortgage loans, while demand for these loans strengthened over the first quarter. Some banks said they eased lending standards on credit cards and other consumer loans. Standards for auto loans remained basically unchanged. Over the first quarter, banks reported stronger demand across all consumer loan categories, the Fed survey said.
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The Fed report can be read at http://src.bna.com/eBj.
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