The deepening oil price slump will intensify pressure on banks globally, with those in major net oil-exporting countries most exposed to credit risks in the near-term, said Moody’s Investors Service.
In a new report on global banks’ credit risks from falling oil-prices, Moody’s said there is a substantial risk that any price recovery may evolve much more slowly in the medium-term, noting there is some risk that prices could fall even further. On 21 January 2016, the ratings agency reduced its forward-looking price estimates in light of continued over supply and tepid demand growth in global energy markets.
Moody’s expects the credit risk for banks in regions which are net oil-exporting will increase as their direct and indirect exposures to low oil prices raise the potential for asset quality deterioration. Still, the ratings agency said that while lower-oil-price implications for global banks’ earnings and solvency appear broadly manageable, low oil prices could still test the creditworthiness of some banks across its global rated portfolio.
“We believe the ‘lower-for-longer’ scenario for oil prices is the base case scenario, and expect that banks in oil-exporting regions will likely see increased risk to creditors as banks’ adjust to this new normal,” said Moody’s Managing Director Frederic Drevon.
Moody’s noted that banks’ corporate lending exposures and capital markets-related activity and exposures could drive downward pressure on their credit profiles, particularly banks in net oil exporting regions. Moody’s analysts also noted that a decline in consumer spending or pressure on GDP growth driven by low oil prices could result in pressure on banks’ asset quality and earnings.
While banks in countries where the oil industry is largely government-owned and/or governments are reliant on oil-related revenues might be less exposed to loan delinquencies given government support to the oil & gas industry, Moody’s noted that governments’ flexibility and/or willingness to support banks that are suffering oil & gas-related losses may decline as the countries fiscal position continues to deteriorate with lower oil prices.