NEW YORK--(BUSINESS WIRE)--Stress in the US energy sector should not materially impact the credit profiles of large consumer lenders with national footprints, says Fitch Ratings. Recent evidence of weakening consumer credit performance in energy producing regions more likely represents a reversion to mean after years of high growth instead of a substantive downturn.
Absent a contagion effect to other sectors, the impact of higher unemployment in regions with outsized exposure to the energy sector is unlikely to be of significant scale to impact the benign environment for consumer credit on a national level.
Most states with the highest exposure to the energy sector, aside from Texas, are less populous, and represent a relatively small percentage of national lenders' portfolios. The seven states most often cited for their exposure to the energy sector - ND, TX, OK, WY, LA, and AK - collectively represented only 12.4% of the US population as of July 2015, according to the Bureau of Labor Statistics. The increasingly diverse economy of Texas, with 8.5% of the nation's population alone, should help to mitigate the effects of the challenges faced by the energy sector.
Although Fitch believes job losses in the energy sector could accelerate if the recent rebound in oil prices is not sustained, initial jobless claims on a national level - a leading indicator for consumer credit losses - remain near historic lows. Unlike the fallout from the housing crisis in 2008, which impacted the majority of US households and resulted in the evaporation of substantial wealth, Fitch believes that the sharp drop in oil prices has led to a broad transfer of wealth from energy producers to consumers. Lower energy prices provide a meaningful boost to consumer discretionary income, which all else being equal should support consumer debt payments.
Further, Fitch believes most consumer lenders are taking proactive measures to mitigate risk such as tightening underwriting standards and reducing credit lines in those regions most impacted by the sharp decline in energy prices over the past 18 months. One potential constraint to lenders' remedial actions is that they must remain mindful of not violating fair lending regulations including redlining.
Though large national consumer lenders should be insulated, Fitch expects elevated credit degradation for community banks and regional lenders that have concentrated consumer loan portfolios in the impacted regions to occur in the near term. Furthermore, the expected resiliency of diversified consumer credit performance contrasts with that of commercial loans in regions with higher exposure to the energy sector, which have already experienced higher loss provisioning and payment defaults.
Fitch believes that a greater potential contributor to a turn in the consumer credit cycle is the resurgence in consumer loan growth, as growth in student loans, auto loans, and personal installment loans have been robust in recent quarters, and certain pockets of credit card issuance such as private label cards, have also accelerated. Sustained increases in consumers' debt burden above the level of personal income growth could result in greater loss severity for lenders, particularly if interest rates rise from current levels. Likewise, an increase in lending to consumers considered subprime appears well underway, particularly in auto, which Fitch views as more likely to reverse the strong consumer credit performance in recent years.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.