What happened?
Some of the nation's regional banks are showing their cards in their fourth-quarter earnings reports, coming clean with investors and analysts about their true energy exposure.

BOK Financial (NASDAQ:BOKF) and Cullen/Frost Bankers (NYSE:CFR) are two banks that lend heavily to energy companies. Their reports were an excellent place to learn more about the potential for energy loan losses in banks that specialize in the industry.

Does it matter?
Absolutely. Banking is a business where the greatest companies are those that make the fewest mistakes. Increasingly, lending to oil and gas companies looks like it could be a very big mistake for many banks.

How big? Pretty big. Industry publication American Banker wrote that analysts are largely expecting banks to build allowances equal to 5% of their energy-related loans this quarter. In other words, analysts generally expect banks to prepare to lose 5% of what they have loaned to energy-related companies over time.

While it may seem small, 5% is substantial when you consider that a bank's balance sheet is often leveraged as high as 10-to-one. If a bank's loans were entirely to energy companies, that kind of loss would likely result in unwelcome visits from the FDIC.

Fortunately, banks are diversified -- even BOK Financial and Cullen/Frost, which have the largest presence in lending to energy companies and specialize in the industry. The table below summarizes their exposures and allowances for future loan losses.


Size of energy loan book

Allowance as percentage of energy loans

BOK Financial

$3.1 billion ($5.6 billion of commitments; energy makes up 10% of total assets)


Cullen/Frost Bankers

$1.76 billion (6.2% of total assets)


Source: Company Investor Relations, conference calls.

About 9.8% of Cullen/Frost Bankers' total energy portfolio is now considered a "problem" credit, up from about 7% in the prior quarter. Cullen/Frost Bankers defended its relatively light reserves by talking about its methodology for how it calculates expected losses on its conference call.

Executives noted that it completed a new stress test wherein it assumed that oil was $28.13 a barrel, and would rise to $55 by 2020 to arrive at increased provisions for the fourth quarter. Importantly, it disclosed that, in its model it assumes that oil does not cross above $41 a barrel until 2020.

BOK Financial noted that 82% of its energy portfolio is first-lien reserve-based lending. Producers, despite the decline in oil prices, generally hold up better than servicing companies, because at least some of their production is hedged.

The company also took issue with the new "5% rule," with one BOKF executive saying that, "while many investors appear to have accepted a 5% loan-loss reserve to outstandings for energy exposure, as a de facto standard, we believe our reserve accurately reflects the risk profile of our energy portfolio" in his prepared remarks on the company's conference call.

BOK Financial and Cullen/Frost Bankers are experienced lenders to oil companies, going so far as to keep petroleum engineers on staff to analyze every deal. It's not all that surprising that their allowances -- and perhaps their expected losses -- are lower as a percentage of energy loans than other banks that merely play in the industry. Only time can reveal the reality of credit quality.