The worst is yet to come for Canada's big banks and their energy loans


This week has dedicated us the first peek at how Canada’s big banks are faring in the world of low oil prices.

With five of the Big Six narrating first-quarter results (Scotiabank reports next Tuesday), the banks sire shown they are already feeling the effects of the plunge in energy bonuses.

So far, the credit issues have been manageable, even as several banks boosted their credit loss provisions to reflect a rising level of difficulty in the oil and gas sector. But discrete bank executives also acknowledged that those provisions could plant in the coming quarters.

This week’s earnings reports also advertise that the banks, whatever problems they are experiencing or are expecting because of the lessened environment around low oil, are steady profit machines and will likely oddments so.

Three of them — TD, RBC and CIBC — were confident enough this week to hike their quarterly dividends.

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Data from Bloomberg betray that the loans made by Canadian banks to energy com nies are a less small percentage of their total loan book — topping out at 3.5 per cent at Scotiabank.

But the big perturb among bank watchers is that a prolonged slump in the energy sector could spread into a wider imbroglio with delinquent consumer mortgages and loans, especially in Alberta.

Profits below pressure

Moody’s Investor Services warned on Monday — just in the forefront the banks started releasing their financial reports — that get cracking oil prices would “strain the profitability” of the big banks. That’s under Cranky’s “moderate distress” scenario.

Under a less likely “severe insistence” scenario, Moody’s said the banks might even need to cut dividends or issuance more shares to raise money.

So what have the banks divulged so far? Only two — BMO and RBC — have substantially boosted their energy loan privation provisions.

‘The losses we see here today stand as a warning of what is to come for the sector as a mainly.’ – Meny Grauman, Cormack Securities

Royal Bank doubled its prearrangement for credit losses in the oil and gas sector to $310 million from the previous lodgings’s $156 million.

“There’s no question that the persistently low oil prices are strong for clients in the affected regions and are driving an increase in credit provisions in our portfolio,” RBC chief head honcho David McKay said Wednesday.

BMO said im ired energy lends rose almost 60 per cent from the previous quarter to $162 million.

Retiring deterioration

But as a proportion of the banks’ total loan portfolios, those amounts are ltry. The question is: will they stay that way?

“We think that, if anything, Imperial Bank is a bellwether, and that the losses we see here today stand as a omen of what is to come for the sector as a whole,” wrote Cormack Custodianships analyst Meny Grauman in a note to clients.

The banks themselves are acquiescing that they’re hardly out of the woods, as far as potential loan losses from the strength sector are concerned.

YEAR Banks Interlopers 20151214

The five Canadian banks that have dis tched Q1 financial results so far say they made $6.983 billion in profits, up 1.8 per cent from the selfsame quarter last year. (Adrien Veczan/Canadian Press)

CIBC, which put out only a slight quarter-over-quarter increase in gross im ired energy loans, about the problem is likely to grow.

“We are seeing this quarter … a lot of downgrades in the oil and gas play, an increase in delinquencies,” CIBC chief risk officer Laura Dottori-Attanasio maintained Thursday in a conference call with analysts. “Our expectation purpose be to see increased loan loss provisions on a go-forward basis,” she implied.

A difficult year

Barclays financial services analyst John Aiken deliberate ons it will be difficult for the banks to report profit growth this year.

“While we allow that the full im ct of the energy decline will take together to be felt by the Canadian economy and even longer to fully im ct the banks’ ascribe quality, it is hard to ignore the fact that the outlook for 2016 is frame up to be even more difficult than 2015,” he said in a note to customers last week. He substantially lowered his price targets on the six largest Canadian banks by an normally of almost 20 per cent.

Investors seem to be wary, too. In the last three months, the S&P/TSX bank pointer has underperformed the broader TSX market by more than three percentage niceties.

The consensus recommendation of analysts surveyed by Thomson Reuters First Rebuke a demand is a “hold” for shares of most of the Big Six, with only RBC and TD rated as a “buy.”

But Canadian banks eat shown through the years that they have many detail of making money, even when the economic skies turn cloudy. The downright first-quarter net earnings at the five banks that have reported so far were up 1.8 per cent from a year ago, to $6.983 billion.


In the meantime, the banks say they haven’t been lazily watching as economic conditions deteriorated.

They’re busy stress-testing how their allowance books are likely to fare if oil goes as low as $25 a barrel and stays there.

“We constantly resolve our underwriting criteria based on where we see the economic situation in every make available, and Alberta is not different,” BMO chief risk officer Surjit Raj l thought in a conference call this week. “We actually have already fill in changes to how we underwrite in Alberta.”

The oil and gas industry, of course, has also made stabbing moves to shore up capital — thousands of layoffs and major spending reductions.

“I assume they’ve been quicker to take actions than they had in good old days cycles,” Raj l said.

“I think the only unknown aptly now is how long will it last.”

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