OPEC Production Cut to Help ... Small Town USA Banks? Yep, and Here’s How ...

2016 was a year of surprises. Things that no one thought possible happened and the markets reacted in ways not many anticipated.

The move by OPEC and non-OPEC countries to reduce oil production and stabilize the global oil industry is aimed at boosting prices and firming up government budgets throughout the cartel.

But the deal could also be good news for businesses in the major oil producing states, as well as the overall U.S. economy. Domestic oil companies would be the primary beneficiaries of increased pricing for domestic oil, and banks around them should also benefit as customer income rises and loan concerns ease.

Let’s take a look at banks with less than $500 million in assets in three major oil producing states -- Texas, North Dakota, and Oklahoma -- and how they’ve been handling the big moves in oil so far.

Based on the third quarter 2016 data, there were 349 banks in Texas with total assets under $500 million, 183 in Oklahoma, and 64 in North Dakota. In the past twelve months, on average, small Texas banks grew their assets 4.3 percent, Oklahoma banks saw growth of 3.7 percent, and North Dakota small bank assets shrank by 1 percent.

Average one-year asset growth in other non-oil producing states was 5.2 percent, so you can see how they’ve been lagging.

Here are the 10 smaller banks in those states who shrank their assets the most over the last year, as well as their Weiss Safety Ratings. (You can build these tables yourself using our banks screener).

When it comes to loan quality, average non-performing loans as a percentage of total loans rose slightly for smaller banks in all three states. Texas increased to 1 percent from 0.9 percent a year ago, Oklahoma banks were up to 1.2 percent from 1.1, and North Dakota increased its average non-performing loans to 1.3 percent from 0.9 percent.

Those are still relatively small increases, though, and overall loan quality compares favorably with industrywide averages. So this suggests banks were already weathering the oil storm fairly well even before the OPEC cut.

If we get substantially higher energy prices in 2017, we can expect to see a surge in domestic production, especially under drilling-friendly president-elect Donald Trump. Oil companies could benefit in a big way and businesses that surround them could see a positive effect, too. That would include U.S. banks.

Or in other words, our data suggests there’s no need to panic about oil-related credit losses ... and there is reason to be optimistic about stronger asset growth. Thanks for helping out banks in Small Town USA, OPEC.