Banks around the world will be coming under pressure from low oil prices as credit risks rise and capital markets are affected, suggests a new report from Moody’s Investors Service.
“There is a substantial risk that any price recovery may evolve much more slowly in the medium-term … [and] there is some risk that prices could fall even further,” the Moody’s report says.
In that scenario, the “deepening oil price slump will intensify pressure on banks globally, with those in major net oil-exporting countries most exposed to credit risks in the near-term,” the report adds.
“We believe the ‘lower-for-longer’ scenario for oil prices is the base case scenario, and expect that banks in oil-exporting regions will likely see increased risk to creditors as banks’ adjust to this new normal,” says Frederic Drevon, managing director at Moody’s.
In general, the likely impact on global banks’ earnings and solvency “appear broadly manageable”, the Moody’s report says; however, it warns that low oil prices could “test the creditworthiness” of some of the banks that it rates.
In particular, the impact of low oil prices on banks’ corporate lending exposures and capital markets-related activity “could drive downward pressure on their credit profiles,” the report says. Additionally, declines in consumer spending or pressure on GDP growth due to low oil prices could also pressure banks’ asset quality and earnings, the report adds.
Earlier this week, both Moody’s and Fitch Ratings sounded the alarm about the possible negative impact of a prolonged oil price slump on the Canadian banks in particular.
See: Deepening oil slump raising potential losses for Canadian banks: Moody’s
See: Canadian banks vulnerable to oil shock and housing correction: Fitch