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posted on 07 February 2016

Oil Industry Exposure: Are Bank Stocks Telling A Story That Investors Should Be Listening To?

by Michael Haltman

Often investors need to look for non-verbal clues concerning the actual direction the economy is heading in!

But, for those who watch or read business news sources, you will typically find that every selloff is presented as a buying opportunity that will be coupled with the phrase 'if you liked ____ stock at $___, you should love it now that it is 'on sale'.

On-the-other-hand, as any investor who was around during the bursting of the tech bubble in the early 2000's knows, there are times when buying on dips or averaging down in specific positions only leads to even greater losses! As examples see Cisco and Yahoo for stocks that analysts pounded the table on as they went down, and down, and get the idea.

Of course over the long-term the stock market averages go up but, that said, investors need to be ready, willing and able to take some personal responsibility over the condition of their money.

Remember that analysts will sometimes have a vested interest either in talking the market up (i.e. sell-side firms) or in attempting to support the price of a stock by touting every sell-off as a buying opportunity (i.e. investment banking business).

LinkedIn As An Example

As an example consider the selloff in the stock of LinkedIn that occurred as a result of earnings back in May 2015 along with the corresponding response from the analyst community...

'...Yet there were not major downgrades on the stock as of Friday morning, according to FactSet, leaving the average rating on LinkedIn among a poll of 36 analysts at overweight.

J.P. Morgan not only reiterated an overweight rating but left its 12-month price target at $300, implying a 49% share-price increase from today's prices. Raymond James reiterated a strong buy on the stock. Cantor Fitzgerald, Canaccord Genuity, Monness Crespi Hardt and Wunderlich all maintained buy ratings.

"The guidance appears substantially worse on the surface and does not appropriately reflect the trajectory of revenue and profits," said Monness Crespi Hardt analyst James Cakmak.

Analysts are calling the dip a buying opportunity, saying the company's outlook is more a reflection of near-term transitions in the business, such as its $1.5 billion purchase of educational website, and foreign exchange headwinds - though Canaccord's Michael Graham said there is no room for LinkedIn to mess up again, given its expensive valuation compared with its outlook...' (Source)

And then last week, due to a poor outlook going forward, LinkedIn traded down as low as $102!

Bank Stocks And Crude Oil Prices: Harbingers Of Things Yet To Come?

So when you consider that analysts can be as wrong as weatherman or economists while often face the same non-existent consequences for those errors, it points once again to the fact that investor involvement in their own financial decision-making is a critical piece of the money management process.

As we have watched the price of a barrel of crude oil crash to the low $30 range, it makes one wonder if a banking crisis similar to the one brought on by the mortgage crisis that pre-dated the financial crisis is even possible and, if it is, whether it might be lurking in the wings.

Many banks hold significant exposure to the energy sector and how that exposure is being handled, or not handled, may hold some clues to whether there may be a shoe to drop in the future.

Varied Bank Stock Price Performance

Interestingly while the S&P 500 (Symbol SPX used as a proxy) is down 11.5% over the past year, bank stocks have faired much worse. And some of those much worse than others...

Goldman Sachs (GS) -28.0% $218.40 High $156.45 2/5 Closing Price

Citicorp (C) -33.9% $60.34 High $39.85 2/5 Closing Price

Bank America (BAC) -29.9% $18.45 High $12.94 2/5 Closing Price

Wells Fargo (WFC) -18.2% $58.52 High $47.85 2/5 Closing Price

JP Morgan -17.6% $70.08 High $57.73 2/5 Closing Price

Providing another piece of the puzzle, courtesy of Zero Hedge, the energy sector exposure of some of the nations banks is presented below.

Is this exposure to the energy sector and underperformance of the banking sector when compared to the S&P 500 merely a function of financials being out of favor, or is it a case of where there's smoke there's fire?

Only time and the markets will tell us that for sure!

JPMorgan Chase & Co, No.1 U.S. bank by assets

  • Energy exposure assumed at 1.6 percent of total loans

  • "If oil reaches $30 a barrel - and here we are - and stayed there for, call it, 18 months, you could expect to see (JPMorgan's) reserve builds of up to $750 million."

  • "Oil folks have been surprisingly resilient. And remember, these are asset-backed loans, so a bankruptcy doesn't necessarily mean your loan is bad."

Bank of America Corp, No.2 U.S. bank by assets

  • Energy exposure assumed at 2.4 percent of total loans

  • "Energy portfolio stress analysis shows $30 oil for 9 quarters would result in about $700 million of losses."

  • "As we continue to assess and react to future changes in the energy sector, we could see lumpiness that could potentially drive provision expense over $900 million."

Wells Fargo & Co, No.3 U.S. bank by assets

  • Energy exposure assumed at 1.9 percent of total loans

  • "We're sensitizing our portfolio based on a continuation of very, very, very low oil prices ... in addition to scenarios that include an upward sloping curve, and we're comfortable with the amount of coverage that we have today."

  • "At current price levels, we would expect to have a higher oil and gas losses in 2016."

Citigroup Inc, No.4 U.S. bank by assets

  • Energy exposure assumed at 3.3 percent of total loans

  • "If oil were $25 for sustained period instead of $30, estimated $600 million cost of credit in first half of 2016 could double."

  • ** Goldman Sachs Group Inc

  • No.5 U.S. bank by assets

  • Energy exposure assumed at 2.1 percent of total loans

  • "From our perspective we feel well-positioned (in terms of energy exposure)."

  • "While we're very focused about it, and are certainly not being complacent about it, we feel pretty front-footed. Even on a relative basis, we have smaller exposures."

Morgan Stanley, No.6 U.S. bank by assets

  • Energy exposure assumed at 5 percent of total loans

  • "We've seen an increase in negative marks within corporate loan book, focus is around energy."

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at

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