Contagion is unlikely for the banks

The banks have taken a beating lately, with the financials ex-property subindex falling 27% for the year to date. One of the big fears for investors has been the banks exposure to commodities, oil and gas lending. However, Uday Cheruvu thinks that their exposure is ‘very manageable’ as the banks only have around 3-6% exposure to these sectors on average. The exposure that the banks do have is mostly to well-established players, with very limited exposure to high-yield lending. “Maybe there is a risk, but the size of the risk is significantly smaller than what people are worried about,” he said. Indeed, leading into the GFC, banks had up to 30% exposure to sub-prime loans, whereas total exposure to oil & gas high-yield lending is closer to 2%. Given the limited exposure, he says contagion in the financial system is unlikely.