Persistent slide in oil prices (currently around $35 a barrel) has become a major concern for banks owing to their exposure to energy-related loans. This has led Hancock Holding Company HBHC to raise its energy allowance for the fourth quarter of 2015.
Hancock announced an increase of nearly $42 million in allowance for loan losses within its energy portfolio. This will bring the total energy allowance to approximately $77.5 million or 4.84% of energy loans as of Dec 31, 2015. Notably, energy loans are projected to comprise roughly 10% of total loans on Dec 31, 2015 (down from 11% of total loans as of Sep 30, 2015).
Hancock’s President and CEO John M. Hairston said, “Recent economic and geopolitical events have caused the price of oil to decline even further and there are no indications that there will be a quick recovery. This updated outlook, coupled with the expectation of charge-offs related to specific credits within the energy portfolio, and signs of additional stress within the energy portfolio, has led us to update our estimated allowance for loan losses.”
Hancock presently expects net charge-offs (NCOs) from energy loans in the range of $50–$75 million “over the remainder of the cycle”; while for the fourth quarter, the same will be $3.5 million. Notably, through the third quarter of 2015, the company has recorded NCOs of less than $1 million from its energy portfolio.
Further, in fourth quarter of 2015, total provision for loan losses is anticipated in the range of $48–$52 million. Moreover, adjusting for the increase in total provision expense, earnings per share are projected to be at par “with the current range of street estimates.”
Essentially, absence of rebound in oil prices will continue to result in underperforming energy loans. Hence, Hancock’s financials are expected to be adversely impacted by a persistent slump in oil prices.
Currently, Hancock carries a Zacks Rank #3 (Hold). Better-ranked finance stocks include Bank of the Ozarks, Inc. OZRK, Capital Bank Financial Corp. CBF and Fidelity Southern Corporation LION. All three stocks hold a Zacks Rank #2 (Buy).
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