In a new report, Morgan Stanley analyst Adam Parker once again cut the firm’s outlook for crude oil prices. After originally calling for a recovery in crude prices to $50/bbl within the next year, Morgan Stanley now believes that oil prices will remain below $30/bbl for at least another 12 months.
Not only is this updated bearish “lower for longer” outlook bad news for the oil market, it’s also bad news for banks with exposure to oil debt.
“US banks have [a] somewhat similar exposure to energy loans [as] European banks: 2% of loans versus 3-10% in Europe, but US banks have higher equity so much lower exposure relative to tangible book,” Parker explains. According to the report, U.S.-listed European banks with the most total oil & gas exposure include ING Groep NV (ADR) ING, Credit Suisse Group AG (ADR) CS and Barclays PLC (ADR) BCS.
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Although a persistent cheap oil environment means an uptick in high-yield energy defaults, Parker notes that B-rated ex-Energy high-yield bonds are now priced near recessionary levels and currently offer an attractive risk/reward.
For now, Morgan Stanley remains underweight on Energy sector stocks. The Energy Select Sector SPDR (ETF) XLE is already down 9.2 percent in 2016.
Disclosure: the author holds no position in the stocks mentioned.
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