'How low could it go?': Banks stress testing loan portfolios for rock-bottom oil


Canadian banks are irresistible a closer look at their loan books in light of continued falls in the price of crude, with one bank stress-testing its oil and gas sector portfolio to see how it would pull off if the commodity dips as low as $25 US a barrel.

“You’ve got to ask yourself, how low could it go?” Bank of Montreal’s chief government Bill Downe said as he laid out the bank’s stress test grand schemes during a conference of bank CEOs in Toronto on Tuesday.

Banks use note tests, which are computer-generated simulations, to gauge how certain hypothetical remunerative events might im ct their businesses.

Although it is studying the worst-case framework of $25 a barrel oil, overall, BMO’s stress tests assume an average expenditure of $35 a barrel over the course of the year.

“I recognize that today the rate of WTI is below that, but I think that’s a reasonable price and assumption,” said Downe, as inconsiderate oil futures were trading close to $30 a barrel.

‘I don’t think we distress a rate cut. I think the Canadian dollar has and will provide the stimulus demanded.’ – Victor Dodig, CIBC

For 2017 the bank is using $30 a barrel oil for its grief tests, and for 2018 it’s considering the potential effects of a $40 a barrel floor plan.

Meanwhile, Royal Bank CEO Dave McKay said he expects oil to start stirring back towards the $50 a barrel range — and maybe slightly mainly — over the next 18 months.

“It’s a little softer than anybody hinted right now,” McKay said.

CIBC chief executive Victor Dodig responded the bank’s stress testing has shown that if the price of oil remains at $30 for three years, the bank command see cumulative loan losses of $650 million.

About 75 per cent of those breakdowns would be in the bank’s business loan books, while one quarter would be in belittling loans, Dodig said.

However, Dodig noted that the burden tests don’t take into account the positive im cts of the low loonie — something that rticular of the CEOs highlighted on Tuesday.

RBC’s McKay noted that Canada’s remunerative woes have so far been contained within oil-producing provinces, extraordinarily Alberta, while other regions are being helped by a decline in the dollar’s value.

“You’re discovering that weaker Canadian dollar drive great strength in B.C.,” he demanded. “You’re seeing great strength in Toronto.”

The low Canadian dollar is expected to inducement more tourists to the country and benefit Canadian exporters by making their by-products more competitively priced in foreign markets.

CIBC’s Dodig answered the low loonie could inject enough fuel into the country’s thrift to mitigate the need for another interest rate cut from the Bank of Canada. The middle bank reduced its key lending rate twice — each time by a mercy of a percentage point — last year.

“I don’t think we need a rate cut,” Dodig hinted. “I think the Canadian dollar has and will provide the stimulus necessary.”

But, he supplemented, “That’s not my call, that’s the call of the governor of the Bank of Canada.”

Although a push rate cut would compress the banks’ lending margins, both Dodig and his counter rt at TD Bank bid they could weather such a move.

“We will adapt to whatever milieu we find ourselves in,” TD’s Bharat Masrani said.

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