Oil impact won’t crush banks

In recent months, bank stock prices have fallen more rapidly than the larger market indexes. Some are actually selling at prices that they touched upon in 2011. The reason is clear: Many investors fear that problems with energy and energy related loans will recreate the crisis of 2008.

But there is virtually no likelihood that problems in one commercial lending sector could return banks to the devastation suffered in 2008. Banks are sound and their stock prices are very appealing.

I recently did an analysis of the aggregate balance sheets of 18 of the nation's largest banks. These companies hold 69 percent of the industry's assets and, therefore, are a good representation of the banking sector's exposure to risk. What the study revealed is that, should there be another recession (I am not predicting one), banks have more risk in their consumer and commercial real estate portfolios than they do in their energy, and metals and mining portfolios.

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An offshore oil rig in the Channel Islands off the California coast.

Using some hypothetical assumptions concerning what the next recession would look like, it appears that bank loan losses could jump by $18 billion in the consumer sector; $6 to $7 billion in the commercial real estate industry, and "only" $3 to $4 billion in energy, and metals and mining.

These numbers were derived by assuming that the banks in my study would be forced to write off 25 percent of their energy and mining loans; 1.5 percent of their commercial real estate loans and 4.5 percent of their consumer loans. Write-offs for these banks would jump by $29 billion in aggregate and this would be 18 percent of current pre-tax earnings.

In sum, not only would an outsized write-off in energy and mining loans not be as large as losses in other bank-loan portfolios, but it would not come remotely close to devastating bank safety and soundness.

Is there a banking crisis in the US?

And, while regulations have meaningfully lowered bank earnings power, they have just as meaningfully improved the strength of bank balance sheets. Over the past decades, it would be normal to have had 60 percent or more of the banking industry's assets tied up in loans. Today, FDIC-insured bank data indicates that this ratio is down to 55 percent. The banks in my study have loan-to-asset ratios of 44 percent on average. Clearly, the smaller the number of loans, the lower the likelihood of loan losses.

The cash and U.S. Treasury holdings of the industry have grown in double-digit percentages, annually, in the past 8 years. In my study, cash and Treasury holdings are up from one-tenth of bank loans to a third of total loans, today. These liquid assets are now 140 percent of bank common equity. Stated differently, banking capital is all cash.

Assuming that bank stocks have fallen due to fears of the impact of energy, and metals and mining on bank portfolios, these stocks are down for the wrong reasons. They represent superior investment opportunities at current prices.

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Commentary by Richard X. Bove, an equity research analyst at Rafferty Capital Markets and the author of "Guardians of Prosperity: Why America Needs Big Banks" (2013).

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