- We think that the market's panic over the potential impact of oil prices and Russia on banks is overplayed, and we see the current dip in share prices as a buying opportunity. Our top pick is BOK Financial (BOKF), which is trading at a rare discount to our fair value estimate. Its significant exposure to energy means that we project losses of 4.9% of common equity in our stress test. While we see this number as manageable for the well-capitalized bank, we think actual losses are likely to be far lower given the bank's conservative energy portfolio.
- In our stress case, banks that we cover experience easily manageable losses from low oil prices and turmoil in Russia. In this scenario, which assumes 5% losses on energy exposures and 15% losses on Russian assets, losses would be the highest at Societe Generale (GLE), at a painful but manageable 5.1% of common equity, and would average 1.7% of common equity across covered banks with known exposures.
- Our worst case assumes an extreme scenario in which all banks experience historic losses on oil and Russia for the market's fears to be realized. Only five banks (BOK Financial, Commerzbank (CBK), Societe Generale, Standard Chartered (STAN), and Cullen/Frost (CFR)) face potential losses greater than 15% of common equity in our worst-case scenario, which assumes 25% losses on energy exposures and 50% losses on Russian assets. An additional five banks ( Crédit Agricole (ACA), Zions (ZION), Comerica (CMA), Barclays (BCS), and Royal Bank Of Canada (RY)) face potential losses of greater than 10% of common equity. These loss rates are not based on average loss rates during past crises but on extreme individual examples of poor risk controls during these crises, and they are very unlikely to be realized, in our opinion.
Morningstar's view is that the decline in oil prices is likely to prove a short-term phenomenon. With U.S. producers drastically reducing spending in 2015, production growth is set to meaningfully slow this year and could even decline in 2016 if prices remain weak. Our longer-term expectation of continued global demand growth leads us to believe that Brent oil prices will again be around $75 per barrel by 2018. It's our view that this is the minimum price necessary to ensure adequate supply over the medium to long term.