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Clark Street Capital’s BAN Report 6/21/17

The BAN Report: Oil Prices in Bear Market Again While Banks Step Up Lending / Banks Curb Provisioning:SNL / Cred Report Black Marks Vanish / Uber CEO Out-6/21/17

Oil Prices in Bear Market Again While Banks Step Up Lending
Steps by OPEC members to limit oil production have not worked, as US producers have stepped up production, sending oil prices back into a bear market as with a 20% decline since February.    
Oil prices are back in bear-market territory, frustrating OPEC members that cut production in an attempt to boost prices and renewing fears that falling prices could spill into stocks and other markets.
A persistent glut has weighed on prices for most of the past three years, a blow to investors who believed that the Organization of the Petroleum Exporting Countries’ move this year to limit production would provide relief.
Instead, U.S. producers ramped up production when the world was already swimming in oil as OPEC members, Russia and other producing nations curtailed output.
U.S. oil production is up 7.3% to 9.3 million barrels a day since OPEC announced plans in November to cut output, and the number of active rigs in the U.S. is at a two-year high.
Prices are down 20.6% since Feb. 23, marking the sixth bear market for crude in four years and the first since August. Crude prices have lost 62% since settling at $115.06 a barrel three years ago. A bear market is typically defined as a decline of 20% or more from a recent peak, while a bull market is a gain of 20% or more from a recent trough.
Obviously, this is good news for consumers, the airline industry, and hotels, but could cause problems in regions dependent on energy.    Meanwhile, many US banks are increasing lending in the energy sector, after paring back in prior years.   Comerica, Zions, and BOK Financial are growing their energy portfolios again. 
The current price range in the $40s is more economically feasible for lenders that specialize in exploration-and-production loans — essentially mortgages secured by the mineral rights, said Jared Shaw, an analyst at Wells Fargo Securities.
“Oil … seems to have stabilized in the high-$40s, low-$50s kind of range,” Harris Simmons, chairman and CEO of the $64 billion-asset Zions, in Salt Lake City, said at a May 31 investor conference. “At that level, there is enough activity going to … continue [loan] demand.”
Cheaper oil has also created a credit environment that is more appealing for some banks, such as the $33 billion-asset BOK Financial in Tulsa, Okla., which has added $1 billion of energy loan commitments in the past 12 months, said Stacy Kymes, executive vice president of corporate banking. Key segments of the industry “are exhibiting growth characteristics that are positive for loan demand,” Kymes said.
About three-quarters of BOK’s energy loans are to oil and gas producers, which means the loans are secured by oil and gas reserves. That provides BOK with some insulation from the sector’s volatility, Shaw said. “They’re seeing better pricing and better structure, and it’s less competitive than it was before,” he said.
A recovery after a correction is often a good time for banks to increase lending, as they can see which energy producers are viable when the price of oil is in the 40s.     Moreover, many banks moved so quickly to shed energy loans that some very strong companies saw their access to credit curtailed.   
Banks Curb Provisioning: SNL
Smaller banks, on the other hand, have elevated provisioning, providing community banks with a larger buffer against loan losses if delinquencies rise. A key measure of provisioning looks at the amount set aside for losses relative to the bank’s net charge-offs for the quarter. If the amount exceeds 100%, it means banks have provisioned more than their loans lost, typically resulting in an increase of aggregate reserves. But if the ratio is below 100%, banks have likely released reserves, providing a boost to profits but shrinking the bank’s buffer against a credit downturn.
After years of releasing a mountain of reserves built up from the 2008 credit crisis, banks with more than $250 billion in assets increased the ratio of provisioning to charge-offs to above 100% in the first and second quarters of 2016. But since then, the ratio has fallen below the key threshold and declined again in the 2017 first quarter, reaching 85%. Meanwhile, banks with less than $10 billion in assets have continued to build reserves, posting a ratio of provisioning to charge-offs of 147% in the first quarter of 2017.
Banks have enjoyed exceptionally strong credit quality in recent years, but some analysts warn that could be coming to an end. In a June 15 report, analysts at Sandler O’Neill wrote that credit had reached a Jack Nicholson moment: “Credit is ‘As Good As It Gets’ right now.” Analysts from Credit Suisse offered a similar assessment in a June 9 note on large-cap banks, writing that “credit costs have passed their cyclical trough and that the predominant trend is now upwards.” At the same time, the analysts did not express concern at the current low level of provisioning of the largest banks as there are not many signs of credit quality deterioration.
It’s very hard for outsiders to determine whether a bank is skimping on reserves, as it would require a better understanding of the bank’s credit quality.    A bank could be increasing reserve levels, but they may still be woefully inadequate.   Or, they could be reducing them and still have excess provisions.    And, there are differences between the risk profile of a bank’s loans.   For example, Capital One reserves 2.89% of all gross loans, but they are a large player in credit cards, especially sub-prime borrowers.     Nevertheless, these banks are all heavily scrutinized by multiple banking agencies, the investment community, and their auditors.    
Credit Report Black Marks Vanish Next Month
Starting July 1, many Americans will see substantial increases to their credit scores, as many liens and judgement will be removed from consumer credit files.   
On July 1, about half of tax liens and almost all civil judgments — both big negatives — will be expunged from consumer credit files, thanks to an agreement the big three credit bureaus made under pressure from regulators and state attorneys general to improve the accuracy of credit reporting.
In September, the three bureaus — Experian, Equifax and TransUnion — will also make consumer-friendly changes in the way medical debts are reported.
Studies suggest that people with liens and judgments could see their credit scores rise after these items are expunged, generally by less than 20 points but in some cases by 40 points or more. In some cases, scores could decrease. How it actually plays out depends on how lenders and credit-scoring companies respond to the changes.
Lenders who want the missing data could simply ask borrowers on a loan application if they have outstanding liens or judgments. Or they could obtain the information from the public record.
Starting on that date, the bureaus will no longer display tax liens and civil judgments on a credit report unless they include the person’s name, address and either Social Security number or date of birth. About half of tax liens and virtually all judgments do not have a Social Security number or birth date, which can cause mix-ups, especially for people with common names or large families.
This creates some big problems from lenders, as they will have to work harder to identify outstanding liens and civil judgments.   Lending based solely on credit bureau scores that does not take these items into account could be significantly mispricing credit.   Naturally, there will be products available to supplement the credit file, but lenders will have to rethink “FICO-only” underwriting.     
Uber CEO Out
Despite a board of directors controlled by loyal allies and significant ownership of the company (estimated at about 10%), investors in Uber forced CEO Travis Kalanick out, making a temporary leave of absence a permanent one.
Pressure from investors, who’ve poured more than $15 billion into a company that has burned through billions, ultimately did what the board could, or would, not: It convinced the 40-year-old chief executive to step aside. Five of Uber’s major investors, including Fidelity and Benchmark, asked Kalanick to step aside in a letter to him entitled “Moving Uber Forward,” according to people familiar with the matter.
Kalanick began an indefinite leave of absence on June 13 and left the day-to-day management of the company to a committee of 14 top executives. Regional operations heads continue to oversee much of the company’s business.
Uber’s been searching for a chief operating officer. With Kalanick’s departure, the company is now also looking for a chief executive officer–a far more desirable position for a business leader. Whoever takes the helm will have to plug a leadership vacuum. Uber needs to hire a COO, an independent board chair, a chief marketing officer, and a general counsel. Many of the company’s top executives were promoted internally after their bosses left, including heads of business, policy and communications, and product.
What’s interesting and noteworthy here is that Uber, like many other tech companies, was set up to ensure that the founder maintained control of the company.    But, Uber is burning cash and reliant on continued funding from outside investors.   If those investors are not on board with the current CEO, they can make continued funding difficult.     Mr. Kalnick’s missteps were plentiful:
He called the company “Boob-er.” He argued with a driver about pay in a video published by Bloomberg. He’s said to have questioned whether a female passenger had been raped by a driver who was convicted of the crime in India. Kalanick co-authored corporate values that included “Let Builders Build, Always Be Hustlin’, Meritocracy and Toe-Stepping, and Principled Confrontation.” Uber now plans to scrap many of those tenets on the advice of former U.S. Attorney General Eric Holder, who just concluded an investigation into the cultural failings of a company built in Kalanick’s image.
Since he owns 10% of the company, his continued involvement was hurting his investment.   Uber had hired Eric Holder, former attorney general, to make recommendations in improving the work culture, and all the findings were adopted by the Board.    Here’s a timeline of the downfall, which came in just a few months.      Even if you are not in a heavily regulated industry, investors and boards are just not going to tolerate a cowboy CEO and culture for too long!

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