Bove waving ‘big red flag’ over potential for banks to take a hit over crude swoon

It’s not just U.S. oil firms that could lose out as a result of the deepening rout in the energy sector. A prominent analyst says banks could fall victim, too, through loans that could go sour. Dick Bove, a vice president of equity research at Rafferty Capital Markets, issued a note to clients Friday warning that “virtually every major bank in the United States has fought for a position in lending money to a variety of energy producers.” He said the loans are made against exploration, production, inventory, and other items that will presumably decline as energy prices fall. West Texas Intermediate prices have plunged 29.8% this year, while Brent, the European benchmark, has seen losses of 34%. “At the very least, the need for new loans to the sector will decline,” Bove said. “At the most there will be a number of bankruptcies among the oil producers which will cause bank loan losses.” Bove also noted he’s not only worried about loans to oil producers themselves – lending to help finance “boom towns” that have developed as a result of the shale revolution could take a hit as well. Indeed, the Financial Times issued a report Wednesday indicating Barclays and Wells Fargo are set to take losses on an $850 million bridge loan to fund a merger between Sabine Oil & Gas and Forest Oil. “I wish I could provide hard numbers concerning the risk here but I cannot. I can only wave a big red flag at this point,” Bove said in closing. [Top Image: Reuters]

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