COVID 19’s Profound Impact on the U.S. Commercial Loan Market · 6/10/2020 · Spain $ 222 Switzerland $ 212 United Kingdom $ 327. U.S. Offices of Foreign Banking Organizations

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COVID 19’s Profound Impact on theU.S. Commercial Loan Market

June 10, 2020

©2020 The Risk Management Association and Automated Financial Systems, Inc. All Rights Reserved. Confidential & Proprietary. June 10, 2020

Agenda for Today

2

1 U.S. Commercial Loan Market – First Quarter Results*

2

3

Special Focus on the Energy Sector

Q&A

* All currency in U.S. dollars.All portfolio statistics based on U.S. commercial loans.


Canadian Bank Presence in U.S. Commercial Banking Market

Country U.S. Office AssetsCanada 1,077$ China 123$ France 436$

Germany 266$ Japan 724$ Spain 222$

Switzerland 212$ United Kingdom 327$

U.S. Offices of Foreign Banking Organizationsby Country

December 2019in billions

3

Source: U.S. Federal Reserve BoardNote: All numbers in this presentation are in U.S. dollars.


Pandemic Impact Analysis by Industry Sector

4

Consumer Discretionary

Equipment & supplies; providers & services; health care technology; pharmaceuticals, biotechnology & life sciences

Consumer Staples

Energy

Financials

Healthcare

Food & staples retailing; food, beverage & tobacco; household & personal products

Oil & Gas drilling, equipment and services; exploration & production; refining & marketing; storage & transportation

Banks & diversified financial services; consumer finance; capital markets; insurance

Automobiles & components; consumer durables & apparel; hotels, restaurants & leisure; retailing

Electric; gas; water; independent power & renewable electricity producers

Software & services; technology hardware & equipment; semiconductors & equipment

Chemicals; construction materials; containers & packaging; metals & mining; paper & forest products

Telecommunication services; media & entertainment

Aerospace & defense; building products; electrical; machinery; comm’l svcs & supplies; professional svcs; transportation

Industrials

Information Technology

Materials

Telecom

Utilities


Unprecedented Loan Growth in the U.S. Marketplace

Commercial loans, all commercial banks, seasonally adjusted, annual growth rate (break adjusted). Shaded area indicates the official length of the last recession. Source: Federal Reserve H.8 Release

U.S. commercial loan balances surged in March, increasing more than 100 percent on an annualized basis. Growth in March was more than double the previous high-water mark in October 2008.

Oct 200841.9%

Mar 2020115.6%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Perc

ent G

row

th

Commercial LoansSeasonally Adjusted Annual Growth Rate

5


Syndicated Borrowers Display Largest Line Drawdowns

Line utilization for commercial revolving lines of credit. Source: AFS Business Intelligence

The March spike in commercial LOC utilization was driven heavily by participated/syndicated borrowers. For bilateral loans, LOC utilization also increased meaningfully month over month in March.

Mar 202042.8%

Mar 202048.1%

20%

25%

30%

35%

40%

45%

50%

2012 2013 2014 2015 2016 2017 2018 2019 2020

Revolving Line of Credit Utilization

Bilateral Loans

Participations/Syndications

6


Line Utilization Spikes Across All Industries

Line utilization for commercial revolving lines of credit. Industry segments based on the Global Industry Classification Standard (GICS). Excludes the Real Estate sector. Source: AFS Business Intelligence

Commercial line of credit utilization increased significantly in 1Q2020, a trend reflected broadly across the industry spectrum. At the sector level, Consumer Discretionary displayed the largest quarter-over-quarter increase in line utilization.

20%

25%

30%

35%

40%

45%

50%

All IndustriesConsumer

Discretionary

ConsumerStaples Energy

FinancialsHealth Care

IndustrialsInformationTechnology

MaterialsTelecommunication

Services

Utilities


4Q19 1Q20

7


Key Interest Rate Trends in the U.S.

Sources: ICE Benchmark Administration Limited (IBA) and Board of Governors of the Federal Reserve System.

0.00.51.01.52.02.53.0

U.S. 1-Month LIBOR %

0.01.02.03.04.05.06.0

WSJ Bank Prime Loan Rate %

0.00.51.01.52.02.53.0

U.S. 10-Year Treasury Constant Maturity Rate %

0.00.51.01.52.02.53.0

U.S. Effective Federal Funds Rate %

8


Mixed Results for Commercial Loan Spread Pricing

Industry segments based on the Global Industry Classification Standard (GICS). Excludes the Real Estate sector. Source: AFS Business Intelligence

Spread pricing for new/renewed LIBOR-based commercial loans declined year over year for half of the sectors, with Health Care experiencing the largest decrease.

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

All IndustriesConsumer

Discretionary

ConsumerStaples Energy

FinancialsHealth Care

IndustrialsInformationTechnology

MaterialsTelecommunication

Services

Utilities

Weighted Average Spreads LIBOR-Based LoansNew and Renewed Loans

1Q19 1Q20

9


Increasing Focus on the Use of Interest Rate Floors in Lending

0% 20% 40% 60% 80% 100%

Bank ABank BBank CBank DBank EBank FBank GBank HBank IBank JBank KBank L

Bank M

Loans w/ Floor as % of Total

LIBOR-Based Loans - Apr 2020

Market

How widely are floors being used in LIBOR-based pricing today?

0% 20% 40% 60% 80% 100%

Bank ABank BBank CBank DBank EBank FBank GBank HBank IBank JBank KBank L

Bank M

Loans w/ Floor as % of Total

Prime-Based Loans - Apr 2020

Market

How widely are floors being used in Prime-based pricing today?

Data based on new/renewed loans. Banks A through M for the LIBOR charts are not necessarily the same institutions as Banks A through M for the Prime charts.. Source: AFS Business Intelligence

10


Trends in Commercial Loan Delinquencies and Nonaccruals

11

Short-term delinquencies (30–89 days past due) spiked in April 2020, reaching a new historical high watermark.

Source: AFS Business Intelligence

0.71%

0.05%

1.72%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Apr 2020

Perc

ent o

f Out

stan

ding

s

% Nonaccruing % 90+ Days Past Due % 30-89 Days Past Due


Commercial Loan Quality: Percent of Total Outstandings

12

The percentage of commercial loans risk rated criticized trended upwards in April 2020.

Classified = percentage of loan outstandings risk rated Substandard, Doubtful, or Loss.Criticized = percentage of loan outstandings risk rated Special Mention, Substandard, Doubtful, or Loss.Source: AFS Business Intelligence

2.40%

6.80%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Apr 2020

Perc

ent o

f Out

stan

ding

s

Classified Criticized


After March Surge, Loan Growth in April Ground to a Halt

-1%0%1%2%3%4%5%6%7%8%9%

10%

Apr 2019 Jan 2020 Feb 2020 Mar 2020 Apr 2020Including PPP

Apr 2020Excluding PPP

Perc

ent G

row

thTotal Commercial Loan Growth (Month over Month)

Central to the U.S. government’s pandemic response was the CARES Act, part of which included $669 billion in forgivable loans under the Paycheck Protection Program (PPP). American banks’ focus on approving and distributing

these PPP loans has had a material effect on loan volumes within other commercial lines of business.


13


Supply and Demand for Commercial Credit

Banks have begun to tighten commercial underwriting standards significantly, but companies still want to borrow.

-100

-80

-60

-40

-20

0

20

40

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Measures of Supply and Demand for Commercial Loans to Large and Middle Market Firms

Supply (Net % of banks tightening standards)

Demand (Net % of banks reporting stronger demand)

Source: U.S. Federal Reserve Board

14

©2020 The Risk Management Association and Automated Financial Systems, Inc. All Rights Reserved. Confidential & Proprietary.

Special Topic:Credit Trends in the Energy Sector


The State of the Energy Loan Market

•The Energy sector faces a precarious supply and demand imbalance that has driven oil prices to historic lows.

•In response to this new volatility, many Energy borrowers are reducing capital spending and tapping commercial lines of credit to shore up cash.

•According to public disclosures1, Energy loans for Canada’s six largest lenders increased 23% in the second quarter.

•Not all Energy subsectors are created equal.

16

1. Big Banks in Canada See a Surge in Energy Loans. Bloomberg. June 4, 2020.


Unprecedented Collapse in Crude Prices

17

The confluence of price wars and COVID-19 drove oil prices to record lows in the second quarter, with some indices in the futures market briefly turning negative. Oil prices rebounded in recent weeks but remain below breakeven levels for many producers.

Source: oilprice.com


Canada Offers C$2.5 Billion in Aid for Hard-Hit Energy Sector

“Canada will invest C$2.5 billion ($1.8 billion) in measures to help the hard-hit oil and gas industry during the coronavirus outbreak. The sector, which accounts for 10.6% of Canada’s gross domestic product, has urged Ottawa to free up credit and cash to tackle the effects of the pandemic and rock-bottom oil prices.

“Trudeau said energy sector workers have faced ‘layers of calamity’ and Ottawa would invest C$1.7 billion to clean up orphan and abandoned wells in three provinces.

“‘Our goal is to create immediate jobs in these provinces while helping companies avoid bankruptcy and supporting our environmental targets,’ [Trudeau] told reporters.

“The government said later that Business Development Bank of Canada will offer energy companies commercial loans, worth C$15 million to C$60 million each, to supply cash flow for 12 months.”

– Reuters, April 17, 202018


Energy Sector Defined for Today’s Presentation

19

Oilfield Services

NAICS 213111 Drilling Oil and Gas Wells

NAICS 213112 Support Activities for Oil and Gas Operations

Upstream/E&P

NAICS 211120 Crude Petroleum Extraction

NAICS 211130 Natural Gas Extraction

MidstreamNAICS 2212 Natural Gas DistributionNAICS 482 Rail TransportationNAICS 486 Pipeline Transportation

DownstreamNAICS 221112 Fossil Fuel Electric Power GenerationNAICS 32411 Petroleum RefineriesNAICS 4247 Petroleum & Petroleum Products Merchant WholesalersNAICS 447 Gasoline StationsNAICS 45431 Fuel Dealers

NAICS = North American Industry Classification System


Energy Sector Loan Growth

20

U.S. Energy lending rallied in late 2018 and continued to increase in the subsequent year. In 1Q2020, loan growth accelerated for the sector, driven by an increase in revolving line of credit utilization.

Sources: U.S. Energy Information Administration and AFS Business Intelligence

$30

$40

$50

$60

$70

$80

$90

$100

$110

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Cush

ing,

OK

WTI

Spo

t Pric

e FO

B (D

olla

rs p

er B

arre

l)

% G

row

th Ye

ar-o

ver-

Year

% Growth Year-over-Year Cushing, OK WTI Spot Price FOB (Dollars per Barrel)


Energy Sector Loan Growth

21

Loan outstanding balances in the U.S. Energy sector hit a low watermark in 1Q2018. Since that quarter, lending in the sector grew rapidly, increasing at a compounded annual growth rate (CAGR) of 15 percent.


$25bn

$26bn

$27bn

$28bn

$29bn

$30bn

$31bn

$32bn

$33bn

$34bn

$35bn

Energy Sector Outstanding Balances

15% CAGR


Energy Sector Revolving Line of Credit Utilization

22

Revolving line of credit utilization spiked quarter over quarter for U.S. Energy borrowers, although the increase was less than half of that seen for All Other Sectors (left chart). At the subsector level, revolving line of credit utilization is much higher for Oilfield Services and Upstream/E&P versus

Midstream and Downstream (right chart).


20%

25%

30%

35%

40%

45%

50%

55%


Energy Sector All Other Sectors

20%

25%

30%

35%

40%

45%

50%

55%

Oilfield Services Upstream/E&P Midstream Downstream


4Q19 1Q20


Bank Exposure to Oilfield Services Decreased Significantly

23

Banks in the database have significantly reduced their exposure to Oilfield Services over the last several years. By contrast, the Midstream subsector has grown to comprise a much larger share of the overall industry exposure.


11.8%

37.7%

14.5%

36.0%


1Q14

Distribution ofOutstandings in the

Energy Sector

5.0%

36.7%

23.9%

34.4%


1Q20

Distribution ofOutstandings in the

Energy Sector


More Trouble on the Horizon?

24

The percentage of U.S. Energy borrowers on nonaccrual increased in 1Q2020, although current nonaccrual levels are well beneath the peak reached during the 2014–2016 oil price crash.


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

% N

onac

crua

lPercent Nonaccrual by Industry

All Industries (exc Energy Sector) Energy Sector


Nonaccrual Trend by Subsector

25


0%

5%

10%

15%

20%

25%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 20

% N

onac

crua

l

All Industries (exc Energy Sector) Oilfield Services

0%

5%

10%

15%

20%

25%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 20

% N

onac

crua

l

All Industries (exc Energy Sector) Upstream/E&P

0%

5%

10%

15%

20%

25%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 20

% N

onac

crua

l

All Industries (exc Energy Sector) Midstream

0%

5%

10%

15%

20%

25%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 20

% N

onac

crua

l

All Industries (exc Energy Sector) Downstream


Problem Energy Loans Are on the Rise

26

The 1Q2020 uptick in the criticized loan ratio for the U.S. Energy sector was driven by an increase in Energy loans risk rated Special Mention.

Percentage of loan outstandings rated Special Mention, Substandard, Doubtful, or Loss.Source: AFS Business Intelligence

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Perc

ent o

f Out

stan

ding

s

Energy Sector Risk Rating Distribution

Special Mention Substandard Doubtful Loss


Criticized Trend by Subsector

27

Percentage of loan outstandings rated Special Mention, Substandard, Doubtful, or Loss.Source: AFS Business Intelligence

0%

10%

20%

30%

40%

50%

60%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 20

% C

ritic

ized

All Industries (exc Energy Sector) Oilfield Services

0%

10%

20%

30%

40%

50%

60%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 20

% C

ritic

ized

All Industries (exc Energy Sector) Upstream/E&P

0%

10%

20%

30%

40%

50%

60%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 20

% C

ritic

ized

All Industries (exc Energy Sector) Midstream

0%

10%

20%

30%

40%

50%

60%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 20

% C

ritic

ized

All Industries (exc Energy Sector) Downstream


Thank You for Taking the Time to Join us Today

Thank you for taking the time to join us today.

Question or comments?

Shawn Fell, AFS Doug Skinner, AFS646-477-0552 [email protected] [email protected]

Jeremy Chalson, AFS Tom Cronin, AFS484-875-1546 [email protected] [email protected]

28

Use of Information. This information is not intended to provide loan advice or recommendations of any kind. The information contained herein is intended for educational, informational, and research purposes only. You use this report and information at your own risk, and RMA/AFS assume no responsibility or liability for any advice or guidance that you may take from this report or the information contained herein. Prior to making any business decisions, you should conduct all necessary due diligence as may be appropriate under the circumstances, and RMA/AFS assumes no responsibility or liability for any decisions, including but not limited to loan decisions, or other services rendered by you based upon this information.

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COVID 19’s Profound Impact on the U.S. Commercial Loan Market · 6/10/2020 · Spain $ 222 Switzerland $ 212 United Kingdom $ 327. U.S. Offices of Foreign Banking Organizations