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Europe's banks face extra provisions for energy exposure
[LONDON] Top European banks have 270 billion of exposure to energy and oil companies and are likely to need to take additional provisions if oil prices remain low for longer, as expected, Moody's Investors Service said.
"A prolonged oil price slump, which is in line with our expectations, would entail more provisions for the large European banks," said Moody's analyst Alessandro Roccati.
"Any future losses from energy companies would eat into their profitability, which is already challenged by the weak operating environment."
Banks in North America and Europe have this year set aside billions of dollars more for potential losses from their exposure to energy companies, after a long-lasting slump in world oil prices.
Citigroup, Bank of America Merrill Lynch and JP Morgan have all built up reserves to prepare for more problem loans to oil and energy firms.
Analysts have said hefty provisions will dent banks' profits this year, but should be manageable for the big lenders to absorb.
Moody's said the energy exposures of 19 big European banks was moderate. It said BNP Paribas, ING, HSBC and Credit Agricole had the highest absolute exposures.
It estimated a moderate stress would trim 10bp off European banks' common equity Tier 1 capital ratios on average and an adverse stress scenario would knock about 30bp off.
Most of their exposures are concentrated in the large integrated oil companies, which Moody's views as being lower risk than upstream, such as exploration and production, and midstream, or transport and storage, oil firms. US and Canadian banks have larger exposures to lower-rated energy industry firms, it said.
European banks have estimated that a third of their credit exposure is to speculative-grade companies, and two-thirds is to investment-grade companies.