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US investment banks' exposure to energy could drag profitability, Moody's says

Moody's said April 7 that exposure to oil and gas could dentthe earnings of large U.S. investment banks but is not likely to affect their capitallevels.

To evaluate the U.S. global investment banks' energy-relatedrisk, Moody's tested the funded and unfunded exposures of major U.S. investmentbanks, including Bank of America Corp.,Citigroup Inc., , and , based on publishedyear-end 2015 disclosures.

Under its moderate and severe test scenarios, Moody's projectedthe losses that the large investment banks would incur in the event of a two-notchand four-notch downgrade, with losses ranging from $130 million to $830 millionunder its moderate scenario and from $600 million to $3.2 billion under its severescenario, depending on the size and composition of each bank's portfolio and theamount of existing reserves. The losses are expected to be driven primarily by higherassumed drawdowns and higher default rates by non-investment-grade exploration andproduction/upstream and services companies within the energy portfolios of the banks.

All of the stress-tested banks would need additional provisioningto cover oil- and gas-related loan losses, the rating agency said."In our severe stress scenario, even if the banks decided to take all the provisionsrequired in a single quarter the hit would still likely be no more than 15% of annualpre-tax earnings," said David Fanger, senior vice president at Moody's.