Six U.S. Regional Banks Outlooks Revised To Negative On Higher Risks To Energy Industry

  • We believe that plunging oil and natural gas prices could lead to asset quality deterioration for U.S. regional banks that have large direct energy exposures or those that operate in economies with a heavy reliance on the energy industry.
  • In addition, the economic downturn associated with the COVID-19 pandemic, as well as increasing pressure on net interest margins given recent Fed rate cuts, will further strain banks' financial performance throughout 2020 and 2021.
  • We are revising our outlooks on BOK Financial Corp., Cadence Bancorporation, Comerica Inc., Cullen/Frost Bankers Inc., Hancock Whitney Corp., and Zions Bancorporation N.A. to negative from stable.
  • The negative outlooks reflect our view that these banks face heightened risk of asset quality deterioration relative to their current rating levels.
NEW YORK (S&P Global Ratings) March 27, 2020--S&P Global Ratings today revised the outlooks on the following institutions to negative from stable: BOK Financial Corp., Cadence Bancorporation, Comerica Inc., Cullen/Frost Bankers Inc., Hancock Whitney Corp., and Zions Bancorporation N.A.
At the same time, S&P Global Ratings affirmed the issuer credit ratings on each institution and its subsidiaries (where relevant):
  • BOK Financial Corp.: 'BBB+'
  • Cadence Bancorporation: 'BB+'
  • Comerica Inc.: 'BBB+/A-2'
  • Cullen/Frost Bankers Inc.: 'A-'
  • Hancock Whitney Corp.: 'BBB'
  • Zions Bancorporation N.A.: 'BBB+'
The outlook revisions primarily reflect our view that plunging oil and natural gas prices could lead to asset quality deterioration for U.S. regional banks that have large direct energy exposures or those that operate in economies with a heavy reliance on the energy industry. In addition, the economic downturn associated with the COVID-19 pandemic, as well as increasing pressure on net interest margins given recent Fed rate cuts, could further strain these banks' financial performance over the next two years.
These outlook revisions follow a broad review of U.S. regional banks with large energy-lending operations. The banks in this rating action all have outstanding energy loan exposures of 4%-18% of total loans and 32%-110% of Tier 1 capital as of year-end 2019. Many have other large loan portfolios that could also be hurt in the current economic environment, including construction and commercial and industrial loans.
Potential downgrades of these six banks depend on numerous factors, including:
  • How the relative riskiness of a bank's energy loan portfolio, as determined by sector exposure, concentration, and borrower strength, could affect asset quality;
  • Broader asset quality trends, including our forecast of nonperforming assets and charge-offs;
  • The sufficiency of capital to withstand possible credit losses; and
  • The degree to which a bank's credit exposure to energy-dependent regions or to sectors sensitive to the COVID-19 pandemic weighs on its risk profile.
(See below for rationales and outlooks for each affected institution.)
Overall, we believe that these regional banks are well-positioned to withstand some deterioration in their asset quality at current rating levels given historically low levels of nonperforming assets and net charge-offs as of year-end 2019. In addition, we believe any asset-quality deterioration as a result of exposure to the energy industry will likely not materialize significantly until at least mid-2020, given borrowers' hedging activities and conservative borrowing base advance rates on most loans.
Nonetheless, we believe the unique catalysts for rapidly declining energy prices, including the failure of OPEC to reach an agreement on cutting supply, combined with a steep reduction in demand related to the COVID-19 pandemic, increase the likelihood that prices may remain low for an extended period. This could increase eventual losses in energy portfolios, all else being equal, in our opinion.
In addition, the capital markets have been largely closed to speculative-grade energy producers and other related companies, thus removing a source of funding that was largely available during the energy price decline in 2015-2016. As in prior downturns, we expect credit exposure to services companies to be the most vulnerable to financial stress, and exposure to exploration and production companies to be better protected given traditional borrowing base credit structures.
Positively, the Federal Reserve's recent actions have increased liquidity for the banking industry and Congress passing the fiscal stimulus bills could help the economy. Nonetheless, the economic fallout associated with the COVID-19 pandemic and current ultra-low interest rates will likely lead to lower earnings and significantly worse asset quality, particularly in industries more affected by the virus.
We will reassess our ratings and outlooks on these banks as the evolving environment necessitates, after considering peers at each rating level.

BOK Financial Corp.

Rationale
The outlook revision on BOK Financial Corp. (BOK) primarily reflects the company's exposure to the oil and gas industry, as well as the economic fallout associated with the COVID-19 pandemic, which we expect will hurt bank industry performance in 2020.
BOK's energy exposure, as a percent of loans and capital, is the highest among the U.S. regional banks we rate. At year-end 2019, BOK's energy loans outstanding were nearly $4.0 billion, or 18.3% of total loans and 110% of common equity Tier 1 capital. Unfunded energy commitments totaled an additional $3 billion, though defensive draws are generally limited by borrowing base credit structures.
Almost 80% of the outstanding energy portfolio is to the production segment, most of which is first lien, senior secured and subject to a borrowing base; 95% of the energy borrowers have some level of hedging in place. In addition, 58% of BOK's energy lending is to the oil industry, while 42% is to gas, which has not seen as substantial a price decline thus far this year.
While we do not believe that BOK has significant exposure to borrowers in other industries that are most hurt by COVID-19 (such as lodging or retail), we expect additional credit pressure in certain segments of non-energy commercial lending. We expect that delinquencies and problem loans may increase over the next few quarters, given the sharp economic downturn.
As a buffer to these risks, BOK has relatively strong capital ratios, including a common equity Tier 1 (CET1) ratio of 11.39% and a tangible common equity to tangible assets ratio of approximately 8.98% as of year-end 2019. Though BOK's profitability will likely be affected in 2020 and next year by a lower net interest margins and higher credit provisions, nearly 40% of BOK's revenues come from noninterest fee revenues, which may offer a partial offset.
Outlook
S&P Global Ratings' negative outlook on BOK reflects the possibility that, given the company's energy exposure, asset quality could worsen over the next two years to a level that may not be in line with the company's consistently strong historical performance and current ratings. In addition, we expect BOK's earnings will be hurt by recent Fed rate cuts, although the overall impact to earnings will be muted partly by its larger-than-peers' contribution from noninterest income sources, such as mortgage finance and asset management.
We could lower the ratings by one notch if we expect a substantial increase in nonperforming assets or net charge-offs. We could also lower the rating if we believe BOK's S&P Global Ratings risk-adjusted capital ratio will decline and remain sustainably below 7%.
Alternately, we could revise the outlook to stable if we believe that net loan losses will remain manageable, and if the economic environment rebounds so that we are more confident that BOK's overall financial performance will remain in line with similarly rated peers.

Cadence Bancorporation

Rationale
The outlook revision on our ratings on Cadence Bancorporation reflects our view that the company could face weakening asset quality, higher provisions, and pressured earnings given current volatile market conditions within the energy industry, as well as its exposure to other sectors, such as restaurants, that appear highly vulnerable to the economic fallout resulting from the COVID-19 pandemic. At year-end 2019, Cadence's portfolio of energy-related loans represented 11% of total loans and included loans to midstream (62% of energy exposure), exploration and production (25%), and services (13%). Its restaurant exposure comprised 8% of loans at year end. Our current ratings on Cadence incorporate its concentrations in potentially higher risk loan classes and our expectations that loan losses could be more volatile than at many regional bank peers. We expect the company will maintain its S&P Global Ratings risk-adjusted capital ratio in the upper end of the 7%-10% range we deem adequate, and maintain its other capital measures at solid levels. We also view positively Cadence's improved funding and liquidity position in the past year, with less reliance on more volatile sources of funds such as brokered deposits. We believe these positive factors could help to sustain it in the face of what could be unstable market conditions over the next year. However, if asset quality or earnings weaken significantly, we could lower our ratings on Cadence.
Outlook
S&P Global Ratings' negative outlook on Cadence reflects the possibility that its asset quality could materially worsen due to its high exposure to vulnerable sectors such as energy and restaurant loans. In addition, we believe Cadence could face earnings pressures as a result of higher net charge-offs, requiring greater provisions for loan losses, and the likelihood of higher economic headwinds resulting from COVID-19 and its corresponding impact on the economy. Our current ratings on Cadence incorporate its concentrations in potentially higher risk loan classes, and our expectations that loan losses could be more volatile than at many regional bank peers. However, if Cadence's nonperforming assets or net charge-offs increase substantially more than our ratings anticipate, or if we believe that earnings will be hurt over a sustained period, we could lower our ratings within the next two years. Alternately, we could revise the outlook to stable if we believe that net loan losses will remain manageable, and if the economic environment rebounds so that we are more confident that Cadence's earnings will remain in line with similarly rated peers.

Comerica Inc.

Rationale
The outlook revision on our long-term rating on Comerica Inc. primarily reflects the company's large loan exposure to the energy sector, which will likely be hurt by the recent sharp drop in oil prices, which may remain low for an extended period. In addition, we think loan performance could deteriorate given weaker U.S. economic growth resulting from the COVID-19 pandemic, particularly among its commercial borrowers, which represent a large proportion of its loan portfolio. More specifically, Comerica's exposure to energy loans of nearly 5% of total loans and construction loans of nearly 8% of total loans could see elevated credit deterioration given the current economic slowdown.
Also, we think the company's net interest margin will decline further throughout 2020 and overall profitability will weaken given recent Fed rate cuts and lower market interest rates, particularly given Comerica's much higher asset sensitivity. As of Dec. 31, 2019, Comerica estimated that a 100-basis-point decline in interest rates would reduce noninterest income by $135 million, or 6%, per year. However, in January 2020, Comerica added interest-rate swaps that convert an additional $1 billion of variable-rate loans to fixed rates through cash flow hedges, which were not included in the company's year-end estimates. As an offset to these risks, we also consider that Comerica has a history of low loss experience and high earnings capacity, while the company's capital ratios, funding, and liquidity position remain solid, in our assessment.
Outlook
The negative outlook on Comerica reflects S&P Global Ratings' view that we could lower the rating given potential deterioration in loan performance amid low energy prices and a weakening economy, as well as net interest margin pressures. Nonetheless, we expect that Comerica will maintain conservative business and financial policies, and we expect the company to maintain stable capital ratios over the next two years. More specifically, we expect the company's CET1 ratio to remain near or above its 10% target even though we expect further pressure on its net interest margin.
We could lower the rating over the next two years if loan performance deteriorates substantially relative to peers, either due to persistent weakness in energy or degradation in the company's construction loan exposures as a result of a broader economic slowdown.
We could revise the outlook to stable if we believe that net loan losses will not be substantial, and if the economic environment rebounds so that we are more confident that Comerica's asset quality, earnings, and capital will remain solid and consistent with similarly rated peers.

Cullen/Frost Bankers Inc.

Rationale
The outlook revision on our ratings on Cullen/Frost Bankers Inc. reflects the company's relatively high exposure to the energy sector that will likely be hurt by the recent sharp drop in and possibly persistently low oil prices. We believe the company's currently good asset quality could worsen to a level that is not commensurate with our ratings on Cullen. Additionally, there is elevated uncertainty about the credit performance of its substantial commercial loan portfolio as a whole, given the shock to the U.S. economy from the COVID-19 pandemic.
As of year-end 2019, energy loans comprised about 11% of Cullen's total loans. (Loans are less than 50% of assets, so the exposure is a more manageable 58% of CET1.) About 83% of the portfolio is to the production segment, most of which is secured and subject to a borrowing base; however, the recent sharp decline in energy prices may cause collateral shortfalls. Additionally, construction loans are about 11% of loans, and this exposure could be more vulnerable to losses in an economic slowdown.
As a buffer to these risks, Cullen has strong capital ratios, including a CET1 ratio of 12.36%, an S&P Global Ratings' risk-adjusted capital ratio of 12.6% and a tangible common equity to tangible assets ratio of approximately 9.3% as of year-end 2019. Similar to peers, Cullen's profitability will likely be constrained in the next few quarters by higher loan loss provisions, as well as a lower net interest margin because of the recent sharp drop in interest rates. However, we believe that Cullen has resilient earnings capacity, illustrated by its historically above-peers return on average assets and net interest margin.
Outlook
S&P Global Ratings' negative outlook on Cullen reflects the possibility that, given the company's energy exposure, asset quality could worsen over the next two years to a level not commensurate with the company's historically excellent credit performance. We also expect that Cullen's earnings may be hurt by higher loan loss provisions, although its preprovision earnings capacity will likely remain commensurate with peers'. We also anticipate that the company will continue to benefit from its good core deposit funding and good balance sheet liquidity over the next two years.
We could lower the ratings if nonaccruals or net charge-offs rise sharply, potentially from the energy or broader loan portfolio. We could also lower the rating if we believe that earnings will be hurt significantly over a sustained period or if we forecast its risk-adjusted capital ratio will decline and remain sustainably below 10%.
We could revise the outlook to stable if we believe that net loan losses will not be substantial and if the economic environment rebounds so that we are more confident that Cullen's asset quality, earnings, and capital will remain solid and consistent with similarly rated peers.

Hancock Whitney Corp.

Rationale
The outlook revision on our ratings on Hancock Whitney Corp. (HWC) reflects our view that the company could face weakening asset quality and higher provisions given current volatile market conditions within the energy industry, as well as its exposure to Texas and southern Louisiana, which have a high reliance on tourism, energy, and other industries more vulnerable to the economic fallout resulting from the COVID-19 pandemic. Moreover, we believe HWC, like other regional bank peers, could face earnings pressures in the next year given the recent steep Fed rate cuts.
Our ratings recognize the significant decline in HWC's direct exposure to the energy industry, with its energy portfolio representing 4.5% of total loans at year-end 2019, compared with 12.4% at year-end 2014. In addition, the mix of this portfolio shifted over this time, with drilling and nondrilling support comprising 52% of energy loans, reserve-based lending 35%, and midstream 13% at year-end 2019. As an offset, we expect the company will maintain its S&P Global Ratings' risk-adjusted capital ratio in the upper end of the 7%-10% range we deem adequate, and maintain its other capital measures at solid levels, with tangible capital remaining at least 8% of tangible assets. In addition, we believe HWC's good core funding and healthy liquidity will continue to sustain it through likely volatile economic conditions over the next year. However, if asset quality or earnings weaken significantly, we could lower our ratings on HWC.
Outlook
S&P Global Ratings' negative outlook on HWC reflects the possibility that its asset quality could worsen given its exposure to energy loans and to broader geographies, such as southern Louisiana and Texas, that the downturn in energy markets and the COVID-19 pandemic could particularly affect. In addition, we believe HWC could see earnings pressure as a result of the recent steep drop in interest rates and higher provisions for loan losses. We could lower the ratings over the next two years if we expect a substantial increase in nonperforming assets or net charge-offs, potentially from the energy portfolio or broader loan portfolio, or if we believe that earnings will be hurt over a sustained period.
Alternately, we could revise the outlook to stable if we believe that net loan losses will remain manageable and if the economic environment rebounds so that we are more confident that HWC's earnings will remain in line with similarly rated peers.

Zions Bancorporation N.A.

Rationale
The outlook revision on our long-term rating on Zions Bancorporation N.A. primarily reflects the company's large loan exposure to the energy sector, which will likely be hurt by the recent sharp drop in oil prices, which may remain low for an extended period. In addition, we think overall loan performance could also be hurt by weaker U.S. economic growth resulting from the COVID-19 pandemic, particularly among its commercial borrowers. More specifically, Zions' exposure to energy loans of nearly 5% of total loans and construction loans of roughly 6% of total loans could see elevated credit deterioration given the current economic slowdown.
In addition, we think loans to energy services borrowers, which we think are more vulnerable to losses, are a somewhat higher proportion of the company's total energy loan portfolio than at other regional banks. Despite hedging activities among energy borrowers, we think classified and criticized assets will rise if oil prices do not rebound materially. We also expect the company's net interest margin to decline throughout 2020 given recent Fed rate cuts and lower market interest rates. Nonetheless, Zions' business position, earnings capacity, capital ratios, funding, and liquidity are solid, having improved over the past decade.
Outlook
The negative outlook on Zions reflects S&P Global Ratings' view that we could lower the rating given potential deterioration in loan performance amid low energy prices and a weakening economy, as well as net interest margin pressures. The negative outlook also reflects the possibility that capital ratios could decline to levels that we view as adequate from levels that we currently view as strong.

We could lower the rating over the next two years if loan performance deteriorates substantially relative to peers, either due to persistent weakness in energy or degradation in the company's construction loan exposures as a result of a broader economic slowdown. We could also lower the rating if the company materially reduces its capital ratios. Conversely, we could revise the outlook to stable if the company does not experience a significant deterioration in its loan performance, reduces higher risk loan exposures, and maintains stable financial performance, consistent with similarly rated peers.
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