NEW YORK (TheStreet) -- Banks that make a lot of loans to businesses in the energy sector could be in trouble the longer oil prices stay low. Without higher oil prices, some of those businesses could have trouble paying back their loans.

Loan losses are rising. The Wall Street Journal reported that big banks including Citigroup (C), Goldman Sachs (GS), UBS (UBS) and others are facing tens of millions in losses on loans made to the energy sector.

The way that oil industry lending works is a factor.

"Most of the lending in the mid-cap bank space is reserve-based, which means that the collateral supporting the underlying loan is the oil in the ground. When doing reserve-based lending, banks tend to heavily discount the value of the oil and require the borrower to hedge against price fluctuations for a set number of years," according to a Morgan Stanley (MS - Get Report) report. "Lending to energy services is less secure and could lead to higher potential losses."

And here's a paradoxical problem: Besides worsening credit quality, actual loan demand could decline, the Dec. 22 report added. "Clearly the risk is to the banks with the most energy exposure, but this also applies to banks providing loans to ancillary businesses throughout the region." Banks with big footprints in Texas, for instance, are particularly at risk, the Morgan Stanley analysts wrote. That is, the loans are bad but there's not enough of them.

On the flip side, consumer-focused banks, particularly those with large consumer credit portfolios, are likely to experience a boost as lower gas prices mean more money for discretionary spending.

Morgan Stanley research analysts took a deep dive across the firm's entire North America coverage universe to assess how "a sustained period of lower oil prices" would affect various sectors and stocks.

The report "highlights stocks for which the effect would be most beneficial, or most challenging," it said. The analysts identified more than 30 industries in which "an extended period of low energy prices would have a material effect," and more than 120 stocks where the effects would be either "especially favorable or unfavorable."

TheStreet paired Morgan Stanley's investment perspectives on the stocks with ratings from TheStreet Ratings, its proprietary research tool, to give an added perspective on the stock picks.

TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Check out which mid-cap and large-cap banks Morgan Stanley analysts are most optimistic and pessimistic about as related to lower oil prices.

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Synchrony Financial (SYF - Get Report)

Impact: Likely beneficiary

Year-to-date return: 6.8%

Morgan Stanley said: 0% of loans are energy related, 100% of loans are consumer related (private label credit card, sales finance and elective health care). SYF benefits in that more cash in consumers' pockets means credit quality improves, especially as about ~1/3 of balances are to subprime consumers. Every 10 [basis points] lower net charge-off ratio adds 5 [cents] to EPS, we estimate.

TheStreet Ratings said: no ratings available

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Capital One Financial (COF - Get Report)

Impact: Likely beneficiary

Year-to-date return: -1.5%

Morgan Stanley said: 60% of loans are consumer-related (credit card, auto). COF benefits from improving credit quality as COF has the second-highest skew to subprime in the large-cap banks group at 24% of U.S. card balances. Every 10 bp lower U.S. card net charge-offs adds 8c to our EPS estimate.

TheStreet Ratings said: TheStreet Ratings team rates CAPITAL ONE FINANCIAL CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate CAPITAL ONE FINANCIAL CORP (COF) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year, growth in earnings per share, increase in net income and attractive valuation levels. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 6.8%. Since the same quarter one year prior, revenues slightly increased by 4.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • CAPITAL ONE FINANCIAL CORP has improved earnings per share by 15.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, CAPITAL ONE FINANCIAL CORP increased its bottom line by earning $7.59 versus $7.27 in the prior year. This year, the market expects an improvement in earnings ($7.62 versus $7.59).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Consumer Finance industry average. The net income increased by 17.3% when compared to the same quarter one year prior, going from $852.00 million to $999.00 million.

 

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Fifth Third (FITB - Get Report)

Impact: Likely beneficiary

Year return: -5.3%

Morgan Stanley said: FITB's energy exposure is relatively small (we estimate ~2% of total loans) as it began building its energy portfolio in [the second half of 2012]. Higher consumer spend and a boost to already improving consumer credit quality could more than offset any drag from the energy portfolio, since its combined [non-residential] consumer lines make up 16% of total loans.

TheStreet Ratings said: TheStreet Ratings team rates FIFTH THIRD BANCORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate FIFTH THIRD BANCORP (FITB) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its expanding profit margins and attractive valuation levels. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for FIFTH THIRD BANCORP is currently very high, coming in at 86.18%. Regardless of FITB's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, FITB's net profit margin of 23.43% significantly outperformed against the industry.
  • FITB, with its decline in revenue, slightly underperformed the industry average of 2.3%. Since the same quarter one year prior, revenues slightly dropped by 3.1%. Weakness in the company's revenue seems to not be hurting the bottom line, shown by stable earnings per share.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Commercial Banks industry and the overall market on the basis of return on equity, FIFTH THIRD BANCORP has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • FITB has underperformed the S&P 500 Index, declining 15.82% from its price level of one year ago. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.

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Hancock Holding (HBHC)

Impact: Potentially challenged

Year-to-date return: -3.3%

Morgan Stanley said: With 13% of loans related to energy, and broad exposure within the sector (52% from Exploration and Production and Drilling Support), HBHC is exposed to possibly elevated losses from oil-related borrowers and a slowdown in energy loan demand.

TheStreet Ratings said: TheStreet Ratings team rates HANCOCK HOLDING CO as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate HANCOCK HOLDING CO (HBHC) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, increase in net income and good cash flow from operations. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • HANCOCK HOLDING CO has improved earnings per share by 17.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, HANCOCK HOLDING CO increased its bottom line by earning $2.10 versus $1.92 in the prior year. This year, the market expects an improvement in earnings ($2.30 versus $2.10).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Commercial Banks industry average. The net income increased by 15.5% when compared to the same quarter one year prior, going from $34.72 million to $40.09 million.
  • Net operating cash flow has slightly increased to $64.79 million or 3.92% when compared to the same quarter last year. Despite an increase in cash flow of 3.92%, HANCOCK HOLDING CO is still growing at a significantly lower rate than the industry average of 294.77%.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Commercial Banks industry and the overall market, HANCOCK HOLDING CO's return on equity is below that of both the industry average and the S&P 500.
  • HBHC has underperformed the S&P 500 Index, declining 22.31% from its price level of one year ago. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.

 

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BOK Financial (BOKF - Get Report)

Impact: Potentially challenged

Year-to-date return: 1.1%

Morgan Stanley said: BOKF is one of the most energy-levered banks in our coverage, not only through its direct energy loans (9.7% of earning assets) but also through its footprint (Oklahoma/Texas). In addition to causing slower Commercial & Industrial loan growth and adverse credit quality, cheaper oil could hurt BOKF's growth prospects as it currently targets expansion into cities such as Houston and Dallas.

TheStreet Ratings said: TheStreet Ratings team rates BOK FINANCIAL CORP as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate BOK FINANCIAL CORP (BOKF) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins and attractive valuation levels. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow, a generally disappointing performance in the stock itself and deteriorating net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • BOKF's revenue growth has slightly outpaced the industry average of 2.3%. Since the same quarter one year prior, revenues slightly increased by 2.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The gross profit margin for BOK FINANCIAL CORP is currently very high, coming in at 94.96%. Regardless of BOKF's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, BOKF's net profit margin of 19.10% compares favorably to the industry average.
  • Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, BOKF has underperformed the S&P 500 Index, declining 11.98% from its price level of one year ago. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
  • Net operating cash flow has significantly decreased to -$13.46 million or 108.04% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

 


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Cullen/Frost (CFR - Get Report)

Impact: Potentially challenged

Year-to-date return: -1.4%

Morgan Stanley said: Roughly 15% of CFR's loan portfolio is energy related and located primarily in Texas. As such, lower oil prices could drive increased credit deterioration and slower [commercial and industrial loan] growth, along with the broader negative impact from a Texas slowdown. However, Cullen/Frost has a reputation for being a high-quality underwriter through the cycle.

TheStreet Ratings said: TheStreet Ratings team rates CULLEN/FROST BANKERS INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate CULLEN/FROST BANKERS INC (CFR) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, compelling growth in net income, expanding profit margins and good cash flow from operations. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 2.3%. Since the same quarter one year prior, revenues slightly increased by 9.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • CULLEN/FROST BANKERS INC has improved earnings per share by 12.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, CULLEN/FROST BANKERS INC increased its bottom line by earning $4.28 versus $3.80 in the prior year. This year, the market expects an improvement in earnings ($4.51 versus $4.28).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Commercial Banks industry average. The net income increased by 16.2% when compared to the same quarter one year prior, going from $62.57 million to $72.70 million.
  • The gross profit margin for CULLEN/FROST BANKERS INC is currently very high, coming in at 96.90%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 27.38% significantly outperformed against the industry average.
  • Net operating cash flow has significantly increased by 52.55% to $111.83 million when compared to the same quarter last year. Despite an increase in cash flow of 52.55%, CULLEN/FROST BANKERS INC is still growing at a significantly lower rate than the industry average of 294.77%.

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Zions Bancorp (ZION - Get Report)

Impact: Potentially challenged

Year-to-date return: -4.4%

Morgan Stanley said: Energy represents 8% of Zions' loan portfolio, with 31% of energy exposure from riskier areas of energy such as oilfield service companies. That said, management recently noted the low level of leverage in its energy services portfolio, and detailed its historical loss experience (less than 1% peak losses in the last major price decline).

TheStreet Ratings said: TheStreet Ratings team rates ZIONS BANCORPORATION as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate ZIONS BANCORPORATION (ZION) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income, good cash flow from operations, expanding profit margins and growth in earnings per share. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 2.3%. Since the same quarter one year prior, revenues rose by 28.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Commercial Banks industry. The net income increased by 297.3% when compared to the same quarter one year prior, rising from -$41.47 million to $81.81 million.
  • Net operating cash flow has increased to $116.88 million or 41.26% when compared to the same quarter last year. Despite an increase in cash flow of 41.26%, ZIONS BANCORPORATION is still growing at a significantly lower rate than the industry average of 294.77%.
  • The gross profit margin for ZIONS BANCORPORATION is currently very high, coming in at 92.71%. Regardless of ZION's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, ZION's net profit margin of 13.83% compares favorably to the industry average.
  • ZIONS BANCORPORATION reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, ZIONS BANCORPORATION increased its bottom line by earning $1.70 versus $1.58 in the prior year. For the next year, the market is expecting a contraction of 4.7% in earnings ($1.62 versus $1.70).


 

- Written by Laurie Kulikowski in New York.