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Oil Fits Texas Banks With a Five-Gallon Hat

By On December 3, 2014 11:28 am

Wall Street Journal

By John Carney

It may not pay to mess with Texas anymore.

Texas banks have been investor darlings for several years thanks to robust growth, a reputation for excellent management and exposure to one of the strongest economies in the U.S. Earlier this year, shares of some Texas banks were trading at more than four times book value—a multiple almost undreamed of for banks elsewhere in the U.S.

Some of that Texas premium has evaporated following word last week that the Organization of the Petroleum Exporting Countries would keep up production levels despite crashing oil prices. But given the risk of a prolonged oil-price slump—and the likely effects on the broader Texas economy—investors shouldn’t be tempted by the large Texas banks.

Lower oil prices aren’t likely to lead to the kind of catastrophic economic downturn that hit Texas in the late 1980s. The economy is much more diversified, with energy accounting for around 11% of the state’s gross domestic product last year compared with nearly 20% in the 1980s.

But a prolonged downturn in the price of oil would almost certainly spread beyond the energy sector to sap business from the new hotels, restaurants, and retail businesses that have sprung up around the shale boom. Real-estate prices could also come under pressure.

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