entities decline. Associate Analyst ANALYST CONTACTS ... · exposures are the riskiest (see “...

FINANCIAL INSTITUTIONS

SECTOR IN-DEPTH18 FEBRUARY 2015

ANALYST CONTACTS

Nick Caes 1-212-553-1382Associate [email protected]

Robard Williams 212-553-0592VP-Sr Credit [email protected]

Gregory W. Bauer 212-553-1498MD-Global [email protected]

Frederic Drevon 44-20-7772-5356MD-Global [email protected]

Khalid F. Howladar 9714-237-9542VP-Sr Credit [email protected]

David Beattie 416-214-3867Senior Vice [email protected]

Allen H. Tischler 212-553-4541Senior Vice [email protected]

Aaron Freedman 5255-1253-5713Associate Managing [email protected]

Eugene Tarzimanov 65-6398-8329VP-Sr Credit [email protected]

Yaroslav Sovgyra 7-495-228-6076Associate Managing [email protected]

Global Banking - Impact of Lower Oil Prices

Lower Oil Prices Pose No ImminentThreat to Bank CreditworthinessWe do not see any imminent threats for rated banks from the recent precipitous decline inoil prices. On balance, lower oil prices will broadly support bank creditworthiness globallygiven lower input costs and improved debt-service capacity for corporate and householdborrowers. Nonetheless, direct and indirect exposures to the drop in oil prices pose thepotential for asset quality and earnings deterioration for several banking systems (particularlyin those countries that are net oil exporters) the longer prices remain depressed. Further,banks in the Gulf Cooperation Council region could face pressure on funding liquidity inthe event that historically high deposit inflows from government and government-relatedentities decline.

Several factors might mitigate the effect of lower oil prices, including the time it will take forlower prices to undermine corporate creditworthiness and the potential for governments tosupport specific sectors and the broader economy. However, these will only partially offsetthe exposure of banks in those systems noted in this report as being most at risk.

The nearly 50% decline in oil prices since mid-June 2014 should, if sustained, provide a boostto the global economic growth rate. However, we have not updated our G20 forecast (see “Lower oil price fails to spur global growth ”), as headwinds from the euro area, China, Braziland Japan hold back global economic activity. Also, lower oil prices will weigh on net oilexporters' growth, which will broadly offset the income gains from lower oil prices.

On balance, lower oil prices will broadly support bank creditworthiness across our globalrated portfolio given the following:

» Consumer exposures – lower household spending on oil will support consumer debt-service capacity, all else being equal.

» Corporate exposures – lower input costs should reduce production and operatingexpenses and improve profitability.

» Capital markets-related activity/exposures – increased oil-related market volatilitycould provide investment banks with higher returns from trades that have been lessprofitable in the last four years owing to stable oil prices.

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1002602

https://www.moodys.com/research/Global-Macro-Outlook-2015-16-Lower-oil-price-fails-to--PBC_1002683

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 18 FEBRUARY 2015 GLOBAL BANKING - IMPACT OF LOWER OIL PRICES : LOWER OIL PRICES POSE NO IMMINENT THREAT TO BANK CREDITWORTHINESS

The ultimate direction and dimension of these factors will vary across regions, countries and individual banks. A generalized slowdownin economic growth, more challenging conditions for energy-related credits and lower demand for banking services will mean thatthe potential for negative pressure on credit quality will be greatest for firms in jurisdictions that are net oil exporters. At this point,however, we do not expect immediate material negative effects on banks' fundamental creditworthiness. Banks have seen broadimprovements in asset quality and capitalization, which should provide them with sufficient resources to absorb any oil-price-drivenloan quality deterioration.That said, the low interest-rate environment and lingering low-growth conditions continue to constrain manybanks' profitability, which could be further eroded by knock-on effects of sustained low oil prices.

This report provides an overview of the degree and direction (positive or negative) of oil-related impacts across our portfolio of ratedbanks, through the key consumer, corporate and capital markets channels discussed above, which we will cover in more detail in theregional snapshots that follow.

Our observations for regions and countries whose economies and, by extension, banking systems are more sensitive to oil marketvolatility include:

» Gulf Cooperation Council (GCC) countries are among the most reliant on oil-related exports and revenues, which are critical tosustaining public expenditures and economic growth in a government-dominated economy. While oil prices are currently belowmost GCC countries’ fiscal break-even point, governments generally have the resources to help mitigate the immediate impactand maintain a supportive operating environment for banks. Nevertheless, a prolonged period of depressed oil prices would reducesurpluses, weaken investor confidence and economic activity and exert pressure on the GCC governments to rationalize expenses.The initial pinch for banks will likely be on the liability side, with reduced deposit inflows from government-related depositors. Loangrowth and profitability are also likely to suffer, although a material impact on asset quality is unlikely in the near term. Amongthe GCC banking systems, Oman and Bahrain are the most vulnerable to sustained lower oil prices given high break-even prices,tighter fiscal positions and relatively low government reserves.

» Russia: The country's economy and banking system already face numerous challenges on top of the fall in oil prices. Russia isentering a sharp and long-lasting recession, with a weakened currency, and is facing rising capital outflows and geopolitical risk.We expect a continued deterioration in the banks’ financial fundamentals; however, the banks' direct exposures to the oil and gasindustry vary widely. For example, the four largest banks (accounting for 60% of banking system assets) report exposures thatrange from 2% to 17% of total loans.

» North America: In Canada, we expect credit costs associated with banks’ consumer portfolios to rise, although this pressurecould be offset somewhat by increased exports due to the depreciation of the Canadian dollar. We also expect rising credit costsfor loan exposures to oil-related corporates, which account for 2% to 3% of total loans, while revenues from underwriting andother capital markets-related activities will suffer. The direct effects on US banks will be limited primarily to specialized regionallenders, while the macroeconomic effects of lower oil prices will be supportive of the operating environment for banks morebroadly.

» Latin America: The fall in oil prices joins a more generalized decline in commodity prices, adding to pressures on region-widegrowth. Venezuela, Ecuador, Colombia and Mexico are large oil exporters and a protracted economic slowdown will negativelyaffect these countries’ banks. In addition, Brazil, which imports as much as it exports, could face greater pressure on growthdue to the slowdown of large infrastructure investments undertaken over the past few years to boost oil exploration. The creditquality of companies directly and indirectly engaged in these project will likely deteriorate given the relatively high cost of offshoreexploration.



» Europe: In the current challenging economic environment, we expect the positive impact of lower oil prices to be small, eventhough most European countries are net importers of oil. The drop in oil prices is adding to the hurdles policymakers face inaddressing already low price inflation and attendant impacts on growth. Two countries, Norway and Austria, have more particularconcerns. For Norway, oil and gas account for more than one fifth of economic output and two-thirds of exports. In addition,many Norwegian companies supply the oil and gas industry, meaning that a significant portion of non-hydrocarbon exports arelinked to the performance of the sector. However, the country’s banks have among the lowest nonperforming loan and highestcapital ratios in the region. For Austria, the primary source of risk derives from the banks’ exposures to Central and EasternEuropean (CEE) countries, and Russia. Indeed, the largest Austrian banks derive a considerable share of their earnings from theregion, representing almost 30% of their banking system assets and Austrian bank claims in Russia represent around 4% of GDP.Therefore, a longer and/or deeper economic slowdown in the CEE region will exacerbate pressure on Austrian banks' financialcondition.

As noted, the impact on banks will differ across regions depending on contribution of oil production and prices to economic growthand the exposures they have to firms in the oil supply chain (Exhibit 1). Exploration and production (E&P) and drilling oilfield servicesexposures are the riskiest (see “ Airlines, Packaged Food, Shipping Get Biggest Lift from Oil Price Plunge ”). Midstream and downstreamcompanies are less likely to be affected, because the former rely on fee-based contracts, and the latter are generally margin businesses.

Exhibit 1

Sources of Direct and Indirect Bank Exposures to Falling Oil Prices

Source: Moody’s Investors Service

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1001985



Exhibit 2

Key Oil-Related Macro Factors for Selected Group of Countries

Country

Consumption2013 (Barrels

Petroleum Consumed /$1000 GDP)

Production 2013(Barrels Petroleum

Produced /$1000 GDP)

Crude Oil ProvedReserves 2014F

(Barrels / $1000 GDP)

Petroleum Imports- Exports* as

% of GDP 2013Fuel Subsidies as% of GDP 2013

Official ForeignExchange Reservesas % of GDP 2014F

GCCKuwait 0.97 5.84 579.93 -45% 4.9% 20%Saudi Arabia 1.45 5.71 344.98 -39% 8.3% 98%Oman 0.73 4.47 61.76 -42% N/A 21%UAE 0.63 3.12 234.85 N/A 5.6% 16%Qatar 0.40 3.73 119.05 -12% 3.1% 19%Bahrain 0.55 0.68 3.66 N/A 7.8% 16%North AmericaCanada 0.49 0.81 96.55 -3% N/A 3%United States 0.41 0.27 2.10 2% N/A 0%Latin AmericaVenezuela 1.26 4.32 1,423.05 -33% 10.2% 0%Ecuador 0.99 2.05 82.00 -14% 6.1% 3%Colombia 0.30 0.99 5.94 -7% 0.0% 12%Mexico 0.59 0.84 7.77 -3% 1.0% 15%Bolivia 0.81 0.76 6.16 -2% 6.5% 39%Brazil 0.49 0.44 6.71 0% N/A 17%Argentina 0.45 0.42 5.26 0% 2.7% 5%Peru 0.31 0.32 3.04 1% N/A 31%Chile 0.45 0.02 0.57 2% N/A 18%EuropeAzerbaijan 0.46 4.37 89.84 -28% 3.6% 22%Kazakhstan 0.41 2.61 132.97 -23% 2.8% 10%Russia 0.61 1.87 38.89 -8% 2.2% 19%Norway 0.16 1.30 11.39 -9% N/A 11%Ukraine 0.55 0.15 2.93 0% 5.8% 11%United Kingdom 0.22 0.13 1.05 0% N/A 2%Italy 0.23 0.03 0.26 2% N/A 2%Netherlands 0.42 0.03 0.17 5% N/A 1%Austria 0.23 0.02 0.11 2% N/A 2%Germany 0.24 0.02 0.06 2% N/A 1%France 0.23 0.01 0.03 2% N/A 1%Spain 0.32 0.01 0.11 3% N/A 2%Sweden 0.20 0.01 - 2% N/A 10%Switzerland 0.15 0.00 - 1% N/A 68%Ireland 0.22 0.00 - 1% N/A 0%AsiaMalaysia 0.77 0.78 11.87 -1% 1.7% 37%Vietnam 1.03 0.76 23.42 -4% 0.7% 19%Thailand 1.20 0.45 1.18 10% 0.9% 42%Indonesia 0.69 0.40 4.37 0% 3.3% 12%India 0.68 0.19 2.76 8% 2.5% 15%China 0.40 0.17 2.35 2% 0.2% 39%Australia 0.26 0.11 0.97 1% N/A 3%New Zealand 0.31 0.08 0.39 2% N/A 9%Philippines 0.43 0.04 0.48 2% N/A 25%Singapore 1.55 0.02 - 12% N/A 91%South Korea 0.65 0.02 N/A 8% 0.0% 25%Taiwan 0.72 0.02 0.00 N/A 0.1% 86%Japan 0.34 0.01 0.01 3% N/A 28%Hong Kong 0.48 0.00 - N/A N/A 116%* Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes; Petroleum oils and oils obtained from bituminous minerals, crude.

Sources: U.S. Energy Information Administration, Comtrade (HS Code 2709), International Energy Agency, IMF, Moody's Investors Service



Regional Snapshot: Gulf Cooperation Council (GCC)The most immediate impact of lower oil prices on GCC banks will be felt on the liability side, notably reduced deposit inflows fromlarge government and government-related entities that may reduce system liquidity. Direct exposures for banks are limited but,depending on the policy responses, a sustained drop in oil prices could also have pronounced negative effects on public spending,confidence and economic growth. This in turn could lead to reduced loan growth and profitability. We expect any immediate impacton asset quality will be low and lag any protracted oil price decline due to the fact that the GCC credit cycle is in its early stagesand banks have yet to revert to riskier underwriting habits as in past cycles. We also observe that GCC banks now have better loss-absorbing buffers than they did in the last crisis.

While we have lowered our overall growth forecasts in the region, we expect banks in the stronger systems (Qatar, Kuwait, SaudiArabia and the UAE) will be less affected as their governments utilize substantial sovereign wealth fund buffers to maintain spending.As we noted in December 2014, the most immediately affected countries will be Bahrain and Oman, each of which has a fiscalbreak-even oil price above current and expected levels for 2015 and 2016 as well as a lower capacity to absorb the associated revenuedecline.

Regarding the financial system more specifically, banks across the region could face some funding liquidity pressures sincegovernments, related entities and National Oil Companies (NOCs) are amongst the largest depositors in the system, providing around

10%-35%3 of banks' non-equity funding. Lower deposit inflows from these entities may constrain loan growth or result in bankstapping more costly wholesale funding markets, either of which would reduce profitability. That said, for most of the region's banks,

market funding is generally limited4 and liquidity buffers are healthy. GCC banks’ liquid assets are equivalent to around 30% of totalassets and loan to deposit ratios stand at 92%, on average, leaving some headroom for banks to adjust to changing funding conditionsin an orderly fashion.

We consider asset quality pressures to be limited in the short term, given the capacity of most GCC governments to support theireconomies, albeit with more modest resources in the cases of Bahrain and Oman. Furthermore, neither corporate leverage nor equityprices have yet returned to the levels seen in 2006-07 and new macroprudential regulations on consumer and residential real-estatelending have also helped to reduce credit risk. Nonetheless, non-oil related exposures at banks could also be pressured, particularly inthe confidence-sensitive real-estate and related sectors, which represent around 15%-30% of GCC banking system loans.

GCC Banks now have thicker loss-absorbing buffers than during the economic crisis, when oil prices fell to $34/barrel in December2008 from $147/barrel six months earlier. Aggregate Tier 1 capital ratios currently stand at around 16% (versus 13% at the end of2008).

With regard to individual banking systems, they will be affected through weaknesses in the operating environment rather than throughdirect exposures:

» The Oman and Bahrain banking systems are the most immediately vulnerable to a period of prolonged low oil prices owing to acombination of high fiscal break-even oil prices ($102/barrel and $127/barrel, respectively) and lower reserve buffers (60% of GDPfor Oman, 0% for Bahrain). Oman's economy remains relatively undiversified, with a high reliance on public spending – for 2014,

government expenditures were equivalent to around 47% of GDP2 . Bahrain’s external position is stronger than Oman's and itseconomy more diversified, but the country's banks are operating in an environment already weakened from a protracted periodof economic and social pressures. In addition to reduced liquidity, prolonged low oil prices will present both countries' bankingsystems with growth, profitability and, possibly, asset quality pressures from 2016 onward.

» The Saudi Arabia and UAE banking systems are likely to be moderately affected in the mid-term despite large reserve buffers(100% and 140% of GDP, respectively) and large non-oil sectors, owing to their relatively high fiscal break-even oil prices ($106/barrel and $77/barrel). Although the UAE's economy is more diversified and has a lower break-even price, Dubai’s open economy,aggressive leverage appetite and large confidence-sensitive real-estate sector moderate these benefits. Nonetheless, bothcountries can comfortably support elevated public spending levels over the next 12-18 months, which in turn will support bank




fundamentals. A sustained drop in oil prices would reduce government surpluses, particulary in Abu Dhabi, and will weigh onsystem liquidity. In addition, we expect credit growth to be more subdued.

» Banks in Kuwait and Qatar will likely be the least immediately impacted by a period of prolonged low oil prices. While fiscalbreak-even prices in these systems are at, or very near, current market prices ($54/barrel and $60/barrel, respectively), both

sovereigns maintain large reserve buffers (320% and 140% of GDP1 ). Accordingly, apart from some reduction in system liquidity,which we expect to be more pronounced in Qatar, these strengths will allow these governments to moderate the effects of aprotracted decline on the operating environment through continued public spending.

Exhibit 3

Oil Price as Leading Indicator for Bank Asset Quality - Saudi Arabia

Source: U.S. Energy Information Administration, Moody’s Investors Service

Exhibit 4

Oil Price as Leading Indicator for Bank Asset Quality - Kuwait


Exhibit 5

Oil Price as Leading Indicator for Bank Asset Quality - Oman

Source: Central Bank of Oman, U.S. Energy Information Administration

Exhibit 6

Oil Price as Leading Indicator for Bank Asset Quality - Qatar

Source: U.S. Energy Information Administration, Moody’s Investors ServiceExhibit 7

Oil Price as Leading Indicator for Bank Asset Quality - Bahrain


Exhibit 8

Oil Price as Leading Indicator for Bank Asset Quality - UAE




Financials & RatingsBelow is a summary of average financial ratios and asset-weighted average long-term ratings for our rated banks in the GCC.

Exhibit 9

Average Return on Average Assets for Moody's Rated Banks - GCC

(1) S1 2014 refers to semi-annual results for the first half of financial year 2014

Source: Moody's Investors Service

Exhibit 10

Average Problem Loans as % of Gross Loans for Moody's Rated Banks -GCC


Exhibit 11

Average Tangible Common Equity as % of Total Assets for Moody'sRated Banks - GCC


Exhibit 12

Average (Market Funds - Liquid Assets) as % of Total Assets for Moody'sRated Banks - GCC


Exhibit 13

Moody's Asset-Weighted Average Long-Term Bank Ratings With Support Levels - GCC

(1) Baseline Credit Assessment (BCA) reflects our opinion of banks' intrinsic, or standalone, financial strength (2) below the chart we show the number of banks we rate in each country




Regional Snapshot: RussiaThe oil price decline has added to existing pressures on Russia, including increased capital outflows, a broad economic slowdown, andrising geopolitical event risks related to the crisis in Ukraine, exacerbated by economic sanctions from the EU, Japan and the US. Theimpact of steeply declining oil prices is material, with around 50% of central government fiscal revenues, 65% of exports and up to25% of GDP linked to the energy sector. The government held $328 billion in foreign-exchange reserves at the end of 2014, whichcomfortably covers total external repayments of $131 billion through the end of 2015. Nevertheless, the collapse of the ruble is causingfurther economic and financial distortions and, as a result, we recently revised our growth outlook for Russia down, expecting a sharprecession until 2017 with real GDP to contract by 5.5% in 2015 and 3.0% in 2016.

Through the course of 2014, the Central Bank of Russia raised the country’s key benchmark interest rate (CBR key rate) to as high as17.0% from 5.5% in an attempt to ease the ruble’s decline (down 80% v. the US$ over 2014). The CBR key rate recently was loweredto 15.0%. As a result of increased rates, consumers' disposable income has been squeezed and banks' funding costs have increaseddramatically, since the short-term funding that the central bank provides to banks (>10% of bank liabilities) immediately re-priced.Banks’ ability to originate credit has accordingly been significantly constrained.

In an attempt to stimulate bank lending, the Russian government announced in January that it would inject capital into those bankswho commit to offer more credit to “priority” industries (the exact sectors remain to be named, but we expect them to include theoil and gas, aerospace, and defense sectors). This could lead banks seeking capital relief to weaken underwriting standards at a time ofacute economic stress, exposing them to even greater asset quality risks.

Both rates and currency depreciation have a material impact on banks' creditworthiness: higher interest rates result in elevatedfunding costs, and currency depreciation could drive an increase in loan defaults from unhedged borrowers. Together, this will erodebanks’ profitability, asset quality and capitalization levels. As we indicated earlier, higher interest rates will also hurt GDP growth,thereby worsening Russian consumer and corporate creditworthiness during the coming year and further pressuring banks' financialfundamentals. Therefore, we expect the Russian banking system to be loss making in 2015 and capital buffers to come under materialpressure in the absence of further capital injections from the government.

While Russian banks have material direct exposures to the oil and gas industry, these vary widely, with the four largest banks, whichrepresent more than 60% of banking system assets, reporting exposures to oil and gas corporates that range from 2% to 17% of totalloans.

Exhibit 14

Oil Price as Leading Indicator for Bank Asset Quality - Russia

Source: Central Bank of Russia, U.S. Energy Information Administration, Moody’s Investors Service




Financials & RatingsBelow is a summary of average financial ratios and asset-weighted average long-term ratings for our rated banks in Russia and theother Commonwealth of Independent States (CIS) for comparison purposes.

Exhibit 15

Average Return on Average Assets for Moody's Rated Banks - CIS


Exhibit 16

Average Problem Loans as % of Gross Loans for Moody's Rated Banks -CIS


Exhibit 17

Average Tangible Common Equity as % of Total Assets for Moody'sRated Banks - CIS


Exhibit 18

Average (Market Funds - Liquid Assets) as % of Total Assets for Moody'sRated Banks - CIS


Exhibit 19

Moody's Asset-Weighted Average Long-Term Bank Ratings With Support Levels - CIS





Regional Snapshot: North AmericaIn North America, the impact of oil prices on the economy differs quite substantially by region. The economic slowdown in the oil-producing Canadian provinces and US states will lead to fiscal pressures in those jurisdictions. For Canada, as a net oil exporter, thepotential effects on broader economic growth are generally negative. For the US, on the other hand, the positive impact on consumerspending and increased business investment as a result of lower corporate input costs have raised our US GDP growth forecast inFebruary.

Nevertheless, owing to the large costs involved with oil exploration in North America, some projects become non-viable at currentoil prices, resulting in large cuts in oil and gas companies' capital expenditures and investments. Stalled projects will also result in jobcuts in oil-intensive regions, which will have a material effect on consumer spending power and could lead to credit losses at banks,generally smaller regionally focused lenders.

Canada

» Since Canada is a net oil exporter, sustained low oil prices will introduce more pronounced pressures for the country as a whole.Our expectation is for higher consumer credit costs for banks, though these could be offset to some extent by improved prospectsfor exports due to depreciation of the Canadian dollar.

» Impairments in banks' energy loan books (which represent an average of 9% of corporate loans or 2%-3% of total loans atCanadian banks) are likely to rise, especially if oil prices stay low for a prolonged period, though the size and diversity of the banks’other operations should help offset some of the negative effects on earnings. Additional mitigants include hedging programsundertaken by many producers; the high proportion of investment-grade credits (including utilities with minimal commodityprice risk) on the books of the Canadian banks; the fact that much of the non-investment-grade exposure is secured by 'proven,developed and producing' reserves; and the depreciation of the Canadian dollar, which reduces relative Canadian dollar costs andcontains the impact on producers, whose output is priced on US dollar benchmarks.

» Canadian banks' investment banking activities will suffer from slower underwriting and capital markets revenues. As oil and gasissuers cut spending or scale back expansion in response to the drop in oil prices, budgets will fall below expectations, resulting inlower levels of capital markets activity. That said, M&A activity may pick up as better-capitalized firms use the opportunity to pickup properties at favorable prices, leading to greater consolidation in the industry and creating advisory fee opportunities for banks.

United States

» Reduced energy costs will be positive for the operating environment of US banks and positive with regard to the asset qualityof their consumer exposures. Even though US shale gas exploration and production has significantly increased over the last fewyears, the US remains a large oil consumer, and we expect that lower oil prices will support the balance of payments and privateconsumption via increased spending power. This should translate into a boost of US GDP growth to 3.2% in 2015 and 2.8% in2016, driving business investment and increased real wages that support borrowers’ debt-repayment capacity.

» Based on our survey of a sample of rated US regional banks, we conclude that the overall credit strength of these firms will notbe materially affected by the decline in oil prices since banks' direct exposures to the energy sector are limited. Energy loansaccounted for less than 2% of the overall loan portfolio of the rated US regional banks we surveyed, with around 60% of thatrelated to oil companies, presenting limited asset-quality risks.

» Nevertheless, banks with larger energy concentrations in their loan books will suffer credit losses from low oil prices, as US oilproducers have lower capacity to repay the high debt burden they have taken on in recent years to invest in the more expensivetechnologies required for shale exploration. Smaller, regionally focused banks, in particular, could face profitability and asset-quality pressure from their exposures to smaller E&P and drilling & oilfield services companies, which have taken on significantdebt and will have reduced cash flows. Additionally, banks' oil-related loan originations could decline, adding to revenue pressures.Small banks will also start deleveraging and reducing their oil-related exposures by cutting credit lines to energy companies.



» US-based global investment banks could face some revenue pressure across lending, advisory, securitization, underwriting, marketmaking and trading. Lower capital expenditures among oil-related corporates will reduce capital market revenues from debt andequity underwriting, IPO advisory and loan syndication. Banks' trading revenues could be pressured if debt and equity defaultsamong (mainly high-yield) oil-related corporates increase materially, and also through the payout on credit derivative products,which could reduce liquidity in other sectors of the high-yield bond market. Finally, investment banks could also suffer losses onthe large oil-price hedge deals that they have in place with oil companies. Nevertheless, we currently expect that the positivemacro-effects from lower oil prices will have a more pronounced positive impact than the negative exposure risks banks are facing.

Financials & RatingsBelow is a summary of average financial ratios and asset-weighted average long-term ratings for our rated banks in North America.

Exhibit 20

Average Return on Average Assets for Moody's Rated Banks - NorthAmerica


Exhibit 21

Average Problem Loans as % of Gross Loans for Moody's Rated Banks -North America


Exhibit 22

Average Tangible Common Equity as % of Total Assets for Moody'sRated Banks - North America

(1) Lower leverage ratio for Canadian banks is driven by low risk weights on their large mortgageloan portfolios


Exhibit 23

Average (Market Funds - Liquid Assets) as % of Total Assets for Moody'sRated Banks - North America


Exhibit 24

Moody's Asset-Weighted Average Long-Term Bank Ratings With Support Levels - North America





Regional Snapshot: Latin AmericaThe most important upshot of low oil prices for Latin American banks will be the impact on regional growth. While banks in the regionhave limited direct exposure to oil prices, banks in the large oil-exporting countries of Venezuela, Ecuador, Colombia and Mexicowill be negatively affected by the economic slowdown caused by lower oil prices. Additionally, banks in Brazil, which imports about asmuch oil as it exports, will suffer from a slowdown in large infrastructure investments that have been initiated over the last few yearsto boost future oil exploration. As a result, the unemployment rate across the region is expected to rise, which will likely put negativepressure on banks' consumer exposures.

While more than 30% of all corporate bonds issued by Latin American corporates over the last four years are directly related to oiland gas companies, banks' direct oil-related loan exposures are relatively low, ranging between 1% and 7%, as many of the largestcorporates are government-owned. Nevertheless, most large banks have exposures to these companies as well as exposures to oil-related corporates such as construction and equipment companies. The credit risks of bank exposures to these large government-owned companies is partly offset because we expect that these firms will receive government support, if necessary, but this is less likelyfor smaller private sector oil companies.

Exposures to other commodities-related firms outside the oil industry could also lead to losses, because of the more general decline incommodity prices (Exhibit 25).

Exhibit 25

Commodity Prices, Other Than Oil, Have Been Declining as Well, on the Back of Weaker Export DemandIndex for Selected Commodities (June 2012 = 100)

Source: IMF

Over the past few years, large capital investments have been made to support infrastructure projects to increase oil explorationand production, and the banks’ exposures to such projects could be larger than those to oil-related corporates. Low oil prices willmake some of those projects non-viable, or leave them stalled, leading to increased nonperforming loans and credit costs for banks.Additionally, banks could feel some pressure in their holdings of oil and gas-related bonds, though banks' corporate bond exposuresaccount for a relatively small share of their total securities holdings as well as total assets.

Oil and gas-related sectors have also played a material role in the growth of the region's investment banking activity, as manyinvestments in oil exploration and production projects are under way, particularly in Brazil and Colombia. Large foreign globalinvestment banks have been driving investment banking activities in the region, though the largest Brazilian and Mexican banks havebeen growing their investment banking activities and we expect their equity and debt capital market businesses to suffer from lowerrevenues from the oil industry. At the same time, lower oil prices could lead to an increase in M&A activity in the region as companiesare forced to shed assets to boost liquidity, which would benefit bank revenues.



» Brazil: Since Brazil imports about as much oil as it exports, we expect a net neutral effect on its growth. In terms of real incomeeffects, lower oil prices have been offset by an increase in petrol taxes. Additionally, Brazil has significantly increased its investmentin oil exploration and production in recent years with a goal of eventually becoming a net oil exporter. Since much of thisactivity is focused on the country’s expensive offshore fields, low oil prices, coupled with the ongoing concerns about corruptioninvestigations involving the state oil company Petróleo Brasileiro S.A. (Petrobras, Baa3 review for downgrade), will lead to lossesfor Brazilian oil exploration companies, and may put several infrastructure projects on hold. Oil-related exposures range from1%-6% of total loans for a selected group of large banks; however, these banks' financial fundamentals have also been underpressure from their other commodities exposures.

» Mexico: Even though Mexico is a net oil-exporting country, the short-term GDP impact of the drop in oil prices should bemanageable, as crude oil accounts for less than 15% of total exports, and high domestic gasoline prices should benefit the budgetin the short-term. Additionally, the federal government has hedged oil-related revenues in the budget. However, the governmentrecently announced expenditure cuts of around 0.7% of GDP for 2016, owing to lower oil prices and in anticipation of lower oilproduction levels. Even though two-thirds of the cuts will be on current expenditures, they will be credit negative for banks withexposures to infrastructure companies, Mexico’s oil company Petroleos Mexicanos (PEMEX, A3 stable), utility company ComisionFederal de Electricidad (CFE, Baa1 stable) or any of their suppliers, as a result of lower capital expenditures at these companies.Additionally, we expect lower oil prices to challenge the government’s energy reform agenda, which aims to encourage explorationof its large oil reserves.

» Colombia: While the oil sector accounts for just 6% of GDP, it represents more than half of total exports. Although GDP growthwill decline owing to lower oil prices, lower residential construction and a slowdown in private consumption, we expect it toremain a relatively robust 3.6% in 2015 down from 4.8% in 2014. At the same time, exchange-rate depreciation will act to absorbthe price shock and should support non-oil exports. Banks' direct oil-related bank exposures appear to be low, with loans to oilcompanies and their suppliers accounting for just 1%-5% of the total portfolios for rated banks (which represent about 60% ofbanking system assets). Nevertheless, following a period of expansion in oil industry infrastructure, more than half of the foreigndirect investment into the country for each of the past five years was related to the oil and mining sectors and we expect theseinvestments to decline, which could cause asset-quality pressures for banks.

After years of rapid growth, Latin American banks' nonperforming loan ratios are at fairly low levels, though we expect that slowingeconomic growth across the region will exacerbate the loosening in credit underwriting over the past several years, causing assetquality to weaken modestly in 2015. To a lesser extent, losses related to corporates in the oil industry could result in some additionalasset-quality weakening. The moderation in loan growth and potential increase in credit costs will further weigh on Latin Americanbanks' profitability. Nevertheless, most banks have solid capitalization levels, providing them with sufficient room to absorb potentialloan losses. Colombian banks’ are notable outliers and we expect their capitalization to remain weak. Further, liquidity is adequateacross Latin American banking systems and reliance on market funding is limited.

https://www.moodys.com/research/Moodys-downgrades-Petrobras-ratings-to-Baa3-maintains-review-for-further--PR_316803

https://www.moodys.com/credit-ratings/Petroleo-Brasileiro-SA-PETROBRAS-credit-rating-603100

https://www.moodys.com/credit-ratings/Petroleos-Mexicanos-credit-rating-94100

https://www.moodys.com/credit-ratings/Comision-Federal-de-Electricidad-credit-rating-600009310

https://www.moodys.com/credit-ratings/Comision-Federal-de-Electricidad-credit-rating-600009310



Financials & RatingsBelow is a summary of average financial ratios and asset-weighted average long-term ratings for our rated banks in Latin America.

Exhibit 26

Average Return on Average Assets for Moody's Rated Banks - LatinAmerica


Exhibit 27

Average Problem Loans as % of Gross Loans for Moody's Rated Banks -Latin America


Exhibit 28

Average Tangible Common Equity as % of Total Assets for Moody'sRated Banks - Latin America


Exhibit 29

Average (Market Funds - Liquid Assets) as % of Total Assets for Moody'sRated Banks - Latin America


Exhibit 30

Moody's Asset-Weighted Average Long-Term Bank Ratings With Support Levels - Latin America





Regional Snapshot: EuropeSince most European countries are net oil-importers, lower oil prices should have a positive effect on consumers' finances, allowingthem to increase savings and/or spending on other goods and services, which should support overall growth. However, lower oil pricesare adding to the hurdles policymakers face in addressing current low inflation. Indeed, the prospect of low price growth becomingfurther entrenched increases the risk of companies and consumers cutting investments and expenditures and would further increasedebt burdens, which together will weigh on spending, put more pressure on economic growth, and likely overwhelm any positiveeffects on consumption from falling oil prices.

The effect of low oil prices on the already challenging macroeconomic environment in Europe could further constrain banks' abilityto return to full financial health, as low profitability limits their room to write-down still-high nonperforming loans and reduce overallleverage in the coming year. Nevertheless, on the back of new regulations, European banks have increased capitalization, reducedbalance-sheet risks and lowered funding profile mismatches.

With regard to individual countries, Norway will likely feel the greatest pressure on overall growth from the fall in oil prices. Oil andgas accounts for more than a fifth of Norway's economic output and two thirds of exports. Additionally, many Norwegian companiessupply the global oil and gas industry, linking a significant portion of non-hydrocarbon exports closely to the performance of the sector.The sharp fall in oil prices is likely to amplify this softening in petroleum-related activity, which has already prompted a rate cut to1.25% from 1.50% in December 2014 and continues to put pressure on the national currency. Households and corporates will beaffected by lower growth for some time, which could raise credit costs and weaken bank profits.

Norway's large integrated European oil companies should be able to service their debt through the price cycle. However, that mightnot be the case for smaller firms that operate in a single line of business and generally have higher operational costs and debt levels.Ultimately, these first- and second-round effects will add pressure on Norwegian banks' balance sheets and income statements:

» Many large development projects in Norway are no longer economically viable because they were approved at a break-evenprice of up to $80/barrel. Even though banks’ oil-related exposures, which we estimate to be around 7% of total loans for ourrated banks, are not entirely related to high-risk segments, any losses from individual oil-related companies might cut into banks’profitability and raise the risk of broader asset quality erosion.

» However, rated Norwegian banks have among the strongest capital ratios and profitability in the region, and we do not expectthese to be eroded to a point that significantly undermines their creditworthiness.

Exhibit 31

Oil Price as Leading Indicator for Bank Asset Quality - Norway

Source: Statistics Norway, U.S. Energy Information Administration

Rated banks in Austria also face profitability and asset quality deterioration in the event of a prolonged period of lower oil prices, dueto large exposures to the CEE and CIS, particularly Russia and Ukraine. The largest Austrian banks generate a considerable share of their



profits from extensive operations in CEE and CIS countries, which together represented around 30% of consolidated banking systemassets at end-2013. Additionally, Austrian bank claims in Russia represent around 4% of GDP.

Exposures to Russian counterparties are concentrated among a number of rated European banks that operate subsidiaries in Russia.These subsidiaries conduct a mix of corporate and retail banking activities, and some hold significant market shares in Russia. For Raiffeisen Bank International (Baa1 review for downgrade), Unicredit Bank Austria (Baa2 review for downgrade), OTP Bank (Ba3negative) and International Bank of Azerbaijan (Ba3 positive), Russian operations account for 10%-12% of assets. However, thesesubsidiaries also account for 25%-35% of their parents’ consolidated pre-provision income. Hence, although Russian operationsmay not represent an immediate threat to consolidated capitalization via losses on assets, they are an important contributor to thebanks’ performance, especially as western European parent banks face difficulties in their home markets given the low interest-rateenvironment and regulatory pressures to build up their capital bases.

Financials & RatingsBelow is a summary of average financial ratios and asset-weighted average long-term ratings for our rated banks in Europe.

Exhibit 32

Average Return on Average Assets for Moody's Rated Banks - Europe


Exhibit 33

Average Problem Loans as % of Gross Loans for Moody's Rated Banks -Europe


Exhibit 34

Average Tangible Common Equity as % of Total Assets for Moody'sRated Banks - Europe


Exhibit 35

Average (Market Funds - Liquid Assets) as % of Total Assets for Moody'sRated Banks - Europe


https://www.moodys.com/credit-ratings/Raiffeisen-Bank-International-AG-credit-rating-808549486

https://www.moodys.com/credit-ratings/UniCredit-Bank-Austria-AG-credit-rating-600008318

https://www.moodys.com/credit-ratings/OTP-Bank-Russia-OJSC-credit-rating-821871885

https://www.moodys.com/credit-ratings/International-Bank-of-Azerbaijan-credit-rating-809510200



Exhibit 36

Moody's Asset-Weighted Average Long-Term Bank Ratings With Support Levels - Europe





Regional Snapshot: AsiaSince most Asian countries are oil-importers and are highly reliant on oil-consuming manufacturing industries, Asian banks willgenerally benefit from higher economic growth as a result of the fall in oil prices. Low oil prices will increase consumer purchasingpower, reduce input costs for many oil-dependent corporates, and curb high inflation levels in several Asian economies like Indiaand Indonesia. In turn, this will improve monetary policy flexibility by allowing central banks to reduce high interest rates, which willsupport credit growth, raise consumer confidence and improve the quality of banks’ consumer exposures.

» Downside risks will be more pronounced for the region’s substantial oil producers (e.g., Malaysia) and net gas/liquefied naturalgas (LNG) exporters (e.g., Malaysia, Indonesia and Australia). For LNG producers in particular, the negative impact on priceswill be delayed because of the long-term nature of LNG contracts. We note, however, that risks faced by these economies aremanageable, as even Malaysia is a net oil importer: the country imports more refined oil products than it exports crude oil. Also,banks' direct lending to these industries is generally limited: for example, Australian banks' exposure to mining and resources isaround 2% of their aggregate loans.

» In India, Indonesia and Malaysia, lower oil prices have supported fuel subsidy reforms, which eventually will help narrow thecountries’ current account deficits in the cases of India and Indonesia. However, for Indonesia and Malaysia, lower hydrocarbonrevenues have somewhat offset the fiscal gains of fuel subsidy reforms.

» In China, a large oil importer, lower oil prices will benefit private consumption and economic rebalancing. Many Chinesemanufacturers and exporters will leverage lower input costs, and the slowdown in the automotive sector might be offset. However,higher energy taxes and government-controlled prices in some energy and transportation sectors will dampen the impact of loweroil prices. Moreover, lower energy costs will not stop the ongoing and gradual slowdown in economic activity. Instead, it willreduce the need for stimulus to prevent a sharper deceleration in economic activity.

» Japan should feel positive growth effects from lower oil prices, as an oil-importing country with less than 2% of banking systemloans related to the energy sector. However, similar to Europe, lower oil prices might result in lower inflation in Japan, which couldthrow the country back into a deflationary environment with subdued growth in wages. Moreover, fiscal policy will be restrictive,which will dampen GDP growth in the short term.

The large state-owned oil companies in China and Malaysia will have some revenue pressures similar to all oil-related companiesglobally. However, these firms have substantial financial flexibility to cope with lower oil prices, owing to their large cash reserves, andwill very likely receive government support in case of need.

Some bank credit exposures are more at risk, such as loans to oil and gas servicing companies, as well as exploration and offshoremarine because of lower capital expenditures and weaker orders. Singapore banks, for example, have from 5%-8% of their gross loansextended to corporates in the oil and gas industry. On the other hand, Asian banks' relatively large exposures to the transportationsector (e.g., shipping and airlines) throughout the region will benefit from lower oil prices as companies in this sector realize fuel costbenefits. The improved profitability and repayment capacity of transportation companies will eventually stream through to bankbalance sheets and income statements.

Generally Asian banks have limited commodities trading desk activities. However, banks in Asian investment banking hubs (e.g.,Singapore and Hong Kong) could suffer from reduced capital market activity in the oil-related sectors, though the impact should belimited since oil-related sectors are not driving investment banking activities and corporates in other sectors might increase theircapital market activities. Nevertheless, the value of cross-border trade finance transactions involving oil and other commodities willlikely diminish, leading to somewhat weaker revenues for Singaporean and Hong Kong banks active in this market.

Additionally, Asian banks have strong financial buffers in place to absorb any oil-related credit risks. We expect them to maintain thesegiven moderating credit growth. Asset quality remains strong, even though we expect a mild deterioration due to a slowdown in China,high household and corporate leverage, and a likely increase in borrower servicing costs as US dollar interest rates rise in 2015 and theUS dollar strengthens against some regional currencies. We expect Asian banks' strong profitability levels to provide a good first line of



defense against the risk of rising credit costs. Asian banks have strong funding and liquidity profiles, with the exception of Australia andNew Zealand, driven by high reliance on deposit-based funding and low reliance on market funding.

Financials & RatingsBelow is a summary of average financial ratios and asset-weighted average long-term ratings for our rated banks in Asia.

Exhibit 37

Average Return on Average Assets for Moody's Rated Banks - Asia


Exhibit 38

Average Problem Loans as % of Gross Loans for Moody's Rated Banks -Asia


Exhibit 39

Average Tangible Common Equity as % of Total Assets for Moody'sRated Banks - Asia


Exhibit 40

Average (Market Funds - Liquid Assets) as % of Total Assets for Moody'sRated Banks - Asia


Exhibit 41

Moody's Asset-Weighted Average Long-Term Bank Ratings With Support Levels - Asia





Moody's Related Research

Banks

» 2015 Banking Outlooks: Global and Regional Perspectives on Key Bank Credit Factors for the Coming Year (Presentation), January2015 (178490)

» Q4 2014 Canadian Banking Quarterly: Capital Markets and Wealth Management Falter, Personal and Commercial HeadwindsEvident, December 2014 (1001883)

» Russian Interest Rate Hike Will Raise Banks' Funding Costs and Hurt Loan Growth, a Credit Negative, December 2014 (178319)

Sovereign

» Global Macro Outlook 2015-16: Lower oil price fails to spur global growth, February 2015 (1002683)

» Asia Pacific Sovereigns: Credit Impact of Lower Oil Prices, February 2015 (178996)

» Global Oil Price Volatility: Oil-Exporting Sovereigns with Limited Policy Tools Are Most Exposed, December 2014 (1001345)

» GCC Sovereigns: Resilience to Lower Oil Prices Varies; Bahrain and Oman Most Exposed, December 2014 (1001529)

Corporates

» Low Oil Prices Promise Only Modest Benefits Overall in Latin America, February 2015 (1002426)

» Airlines, Packaged Food, Shipping Get Biggest Lift from Oil Price Plunge, January 2015 (1001985)

» Lower Oil Prices in 2015 Reduce E&P Spending and Raise Risk for OFS Sector, January 2015 (1001977)

» 2015 Outlook - Global Oil and Gas Industry: Lower Crude Prices Depress Upstream and Oilfield Services Operations (Summary),December 2014 (1001795)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.

















ContactsNew York +1.212.553.1653 London RESEARCH WRITERS Michael PortaNick Caes +1.212.553.1382 Oscar Heemskerk +44.20.7772.5532 Matt WalterAssociate Analyst Associate Managing Director [email protected] [email protected] DATA VISUALIZATION Lisa MahapatraRobard Williams +1.212.553.0592 Jean-Francois Tremblay +44.20.7772.5653Vice President - Senior Credit Officer Associate Managing [email protected] [email protected] Allen Tischler +1.212.553.4541Senior Vice [email protected] Vassilakis +1.212.553.2997Vice President - Senior [email protected] Dubai Mexico City Khalid Howladar +971.4.237.9542 Aaron Freedman +52.55.1253.5713Vice President - Senior Credit Officer Associate Managing [email protected] [email protected] Toronto Singapore David Beattie +1.416.214.3867 Eugene Tarzimanov +65.6398.8329Senior Vice President Vice President - Senior Credit [email protected] [email protected] Moscow Yaroslav Sovgyra +07.495.228.6076Associate Managing [email protected]



Endnotes1 GDP data are IMF 2014 estimates. Sovereign Wealth Buffers are Moody’s 2014 estimates

2 IMF 2014 estimates

3 GCC Central Banks’ monthly/quarterly statistical bulletins. Definition of Government, Public Sector, GREs is not consistent

4 All figures from Moody’s Bank FM or Central Bank websites as of H1 2014



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