US banks expect energy sector loans to deteriorate 2015

U.S. banks expected their lending to oil and natural gas drilling and extraction sector to deteriorate in terms of loan quality over the remainder of 2015, a Federal Reserve survey showed on Monday.

"Banks expected delinquency and charge-off rates on such loans to deteriorate over 2015," senior loan officers at commercial banks told the Fed in the survey tracking changes in loan terms and standards in the first quarter of the year.

More than half of the banks who made loans to the energy sector expected loan quality to deteriorate somewhat over the course of 2015, the survey revealed.

But the report added banks indicated their exposures were small, as more than 80 percent of the banks who made such loans said that such lending accounted for less than 10 percent of their outstanding commercial and industrial loans.

The report said banks were taking a number of actions to mitigate the risk of loan losses.

The survey, conducted on a quarterly basis, covered senior loan officers at 76 U.S. banks and 23 branches of foreign banks in the first quarter of this year.

In the first quarter of this year, U.S. industrial production recorded the first quarterly decline since the second quarter of 2009. The Fed attributed the decline mainly to a drop in oil and gas well drilling and servicing of more than 60 percent at an annual rate.

The low oil prices have also begun to hurt employment in the energy sector. Data from the Labor Department showed the mining and logging industry, which includes oil and gas extraction, shed 11,000 workers in March and has lost 30,000 jobs so far in 2015 due to the recent decline in oil prices.

Many economists, including Fed officials, acknowledged the adverse impact of low oil prices on the energy sector investment, which would pose a drag on the economy.

Monday's survey results also showed banks have slightly eased their lending standards for some key categories of loans surveyed, such as commercial real estate, construction and land development, and residential mortgage loans.

According to the survey, banks reported little change in demand for commercial and industrial loans in the first quarter, but the demand for commercial real estate loans went strong.