Oil prices have been volatile since the start of 2016 with prices fluctuating between $27 and $42 per barrel. However, the slight recovery in prices is not enough to curb the concern of banks that have considerable exposure to energy-related loans. As a result, Mississippi-based Hancock Holding Company HBHC has raised its expected provision for credit losses for the first quarter of 2016.
Owing to risk rating downgrades (triggered by a prolonged energy cycle) on over $300 million in outstanding energy credits identified recently, Hancock will require around $45 million in additional provision expense in the first quarter of 2016. Therefore, the company expects the total provision for credit losses to be roughly $58–$62 million, when it reports first-quarter earnings results on Apr 19.
Hancock’s previous first-quarter 2016 guidance for provision for loan losses was in the range of $11–$15 million. The company recorded provision for loan losses of $50.2 million in the fourth quarter of 2015, which included $43 million of allowance increase related to energy. The persistent slide in oil prices led to the rise in energy allowance. Notably, allowance for energy loans stood at $78.2 million or around 5% of energy loans as of Dec 31, 2015.
Moreover, according to the guidance provided in the company’s earnings presentation, core pre-tax, pre-provision growth is projected around 25% in 2016 (assuming no additional rate hikes) compared with 2014. Further, management expects net charge-offs (NCOs) from energy loans in the range of $50–$75 million “over the remainder of the energy cycle.”
Banks engaged in energy lending continue to witness significant credit migration in the related loan portfolios. This calls for a hike in provision against such exposure, which, in turn drags down profits of these companies.
Essentially, absence of significant rebound in oil prices will continue to result in underperforming energy loans. Hence, Hancock’s financials are expected to remain under pressure due to volatile oil prices.
Last month, Hancock’s long-term ratings were put under review for downgrade by Moody's due to its huge exposure to energy loans. According to Moody's, the company’s large energy concentrations made it more prone to asset quality deterioration, if oil prices remain depressed.
Currently, Hancock carries a Zacks Rank #3 (Hold). Better-ranked southeast banks include First NBC Bank Holding Company FNBC, Monarch Financial Holdings, Inc. MNRK and CenterState Banks, Inc. CSFL. All the three stocks hold a Zacks Rank #1 (Strong Buy).
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