The Oil Crash Could Trigger Billions In UK Bank Losses
British banks including Royal Bank of Scotland and Barclays may be sitting on billions in losses from the collapse in oil prices after a surge in junk loans to the industry.
Although British lenders are not the most exposed to the oil collapse, with most debt issuance arranged by US and Canadian institutions, leveraged loans arranged by UK lenders have more than doubled since 2011 amid the North American shale boom.
The price of Brent crude has slumped from $110 a barrel last summer to $48.91 on Friday, amid a glut in supply and falling global demand.
While low prices are likely to give a shot in the arm to consumers and manufacturers, many oil producers, particularly in America’s shale gas fields, are likely to be driven out of business.
A lengthy period of cheap crude is likely to trigger widespread defaults and many oil and gas loans are now changing hands for well below their face value as investors fear they will not get their money back.
Banks will offload many of the loans and hedge their losses, and some will have stricter lending standards for high-yield loans than others.
Losses will also depend on how long the oil price stays low, so it is unclear precisely how exposed the banks are to the energy industry’s woes.
Some lenders have privately indicated that they consider the oil price fall to have a positive impact, with the wider economic benefits offsetting the loans they are writing off. However, significant losses are seen as inevitable if prices fail to rebound.
Chirantan Barua, an analyst at Bernstein Research, has estimated that the combined losses of Barclays, RBS, HSBC and Standard Chartered from falling oil prices could amount to $3.4bn.
“Someone is feeling the pain,” said Mr Barua. “When you see [this much] high-yield issuance in a sector that has been levering up across the supply chain, any shocks in the underlying business will have risk ripples across the financial system.”
According to Dealogic’s data, RBS has arranged $14.3bn of leveraged oil and gas loans in the past four years, making it the biggest UK player in the high-yield space.
This compares to $10.5bn for Barclays and $4.7bn for HSBC, but is far less than the biggest Wall Street players. Wells Fargo and JP Morgan have both been bookrunners on almost $100bn since the start of 2011.
Leveraged loans to the industry hit a record high of $72.7bn in the second quarter of last year, before crude’s collapse. They then fell to $53.4bn in the third quarter and $47.8bn in the fourth quarter of 2014.
- The Telegraph
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- January 26, 2015
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