Emerging from the oil bust
The CEO of Amegy Bank of Texas is ready to see some modest growth in energy lending.
Steven Stephens, chief executive of Amegy Bank of Texas, hopes the $14 billion Houston lender can increase its energy loans modestly this year as drillers recover from a brutal oil downturn that forced local banks to shed bad loans for years.
In 2014, before oil prices collapsed, about 20 percent of Amegy’s loans were tied to energy companies, and though the bank felt the financial stress of the worst energy slump in a generation, several developments in the banking industry prevented the kind of widespread fallout that wiped out hundreds of Texas banks in the 1980s bust.
What made Texas banks more resilient this time around? For one thing, Stephens said, the Dodd-Frank Act of 2010, which introduced a myriad of new rules for banks after the Great Recession of 2009, made financial institutions more careful in lending money.
“Some of Dodd-Frank was good, some it was overbearing, but the result was more conservatism in the banking industry,” Stephens said.
In a recent interview with the Houston Chronicle, Stephens recounted Amegy Bank’s journey through the oil bust of 2015 and 2016, and explained why banks performed far better than they did in the 1980s bust.
Q: How did the recent downturn compared with previous oil busts?
A: It’s dramatically different from the economic collapse in Texas in the 1980s. Back then, Texas banking had no geographic diversification, and energy and real estate were the dominant industries, so when energy prices collapsed, real estate values followed, and out-of-state banks had to come bail out Texas banks.
Q: How did that come about?
A: No out-ofstate bank could have a presence in Texas. That was state law. The Independent Bankers Association of Texas had a lot of influence for decades in the state Legislature. They kept out out-of-state banks. But in 1987, the state really had no choice but to change the law and bring in what became rescue capital.
Q: How did the Dodd-Frank Act help?
A: Dodd-Frank was landmark legislation. You had about six years of a lot of regulatory oversight. In previous downcycles, when energy prices went down, real estate values went down, but there were relatively few real estate problems in this downturn. Regulatory oversight required stronger down payments, and there wasn’t as much excess real estate lending. It never got as bad as we feared.
Q: Has the industry improved its financial situation?
A: Everyone has basically recapitalized or found ways to make money in this cycle. A lot of companies reduced their expenses to accommodate the drop in revenue. Many responded very proactively. More so than previous downturns, you had a certain amount of relationships that were privateequity sponsored. On the positive side, they were really driving their management teams. On the negative side, they generally had more debt.
Q: How did the influx of private equity investments affect your lending decisions?
A: In late 2013 and 2014, banks were turning down eight out of 10 loan requests. There were many private equity groups who were getting into the energy sector because it was an attractive sector with all the shale play discoveries. But we made the decision if we’re going to finance any private equity energy loans, the private equity group has got to have energy experience. Q: How did that affect the bank in the downturn? A: Before the downturn came, we’d say, ‘Wow, we set up these lines of credit for our clients but they’re not drawing down their lines. Why is that?’ Well, they could go to Wall Street and get a bond with no covenants, and their cost of capital isn’t that much higher than bank funds. We were frustrated because you don’t make money unless you use your line of credit, and they were funded with the bond debt, but that ended up being a good thing for the bank because when the music stopped, the bank exposure was relatively smaller. So the bond funds absorbed more of the losses than the previous cycles.