Lenders sitting on billions in losses after rise in risky debt to oil and gas companies raises prospect of impairments
The price of oil has sunk in recent months Photo: Alamy
By James Titcomb4:37PM GMT 01 Dec 201464 Comments
British banks face losses of more than £2bn after as risky loans to the oil and gas industry go sour amid the plummeting price of crude.
Banks have piled into the sector over the last three years, with oil and gas accounting for £11 of every £100 of high-yield debt on the back of America’s booming shale industry.
However, oil’s precipitous decline since June has left many of the lenders looking at heavy losses.
Brent Crude prices fell to a low of $67.53 yesterday, the lowest level for almost five years. The price reboundedby around 2pc as of Monday afternoon but remains almost 40pc down since June.
Last week, Opec leaders decided against restricting output in an attempt to squeeze North America’s shale producers – many of whom have borrowed heavily to invest.
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Although much of the banks’ exposure will have been hedged off, Barclays, Royal Bank of Scotland, HSBC and Standard Chartered could face a combined $3.4bn (£2bn) of impairment charges related to oil and gas exposures in the fourth quarter of the year, according to Chirantan Barua, an analyst at Bernstein.
“Nearly $650bn of high yield debt has been issued in the sector since 2011,” Mr Barua said.
“While the broader high yield market is down [around] 20pc year-to-date, oil and gas has been flat with issuance running straight up to the OPEC event. [This] can’t be a good thing for a sudden stress in the market if oil prices stay at this level.”
When you see $650bn of 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.”
While Barclays, HSBC and RBS could be sitting on losses of $1bn each, and Standard Chartered faces $400m of impairments, banks in North America could face much bigger impairment charges.
US and Canadian banks that have lent heavily to the sector on the back of the US shale boom, and high-yield debt to less stable oil companies has increased substantially.
This means a collapse in the oil price is far more dangerous for the banks than it would have been only a few years ago.