Canadian Banks Not over the Worst Impact from Oil Crunch

 

The country's biggest five lenders, including Royal Bank of Canada (RY), Toronto-Dominion Bank and Bank of Nova Scotia, all set aside more funds to cover bad loans to oil & gas firms in the second quarter but their provisions remain relatively low compared to U.S. peers.

 

Although Scotiabank, which has the biggest exposure to the oil & gas sector among Canadian banks at 3.4 percent of its total lending, said energy loan losses had peaked in the last quarter, some analysts say it is too early to make that call.

 

"Just to have losses in these loan portfolios at the levels they've reported so far doesn't seem logical. It seems like they should be higher and I definitely am doubting that this is the end," said Edward Jones analyst Jim Shanahan.

 

The banks are basing their optimism on a partial recovery in the price of oil, which has recovered to around $50 per barrel after hitting a 13-year low of $26 per barrel in February on concerns about an oversupply.

 

"I'm more of a glass half full guy than a glass half empty guy, Scotiabank's Chief Financial Office Sean McGuckin said in an interview on Tuesday. "Definitely you feel better at a $50 price than you do at a $30 price."

 

The banks are still working through semi-annual talks with oil & gas firms to determine how much debt they can continue to hold. The majority are having their credit lines cut, which will make it tougher for some to survive, and the impact of that on banks' profits will be felt in the third quarter and beyond.

 

David Cockfield, managing director of Northland Wealth Management, which owns shares in Scotiabank, Bank of Montreal and TD, expects provisions to rise again in the next quarter and said it will take time for a clearer picture of banks' losses to emerge.

 

"If the price of oil gets back into the $50-60 range, then at least you're going to see some of the guys that are in trouble be able to sell properties. I think that will encourage the guys with money in their pockets to step up, but we may not see that until 2017. These are lingering problems," he said.

 

Banks also face a secondary impact from consumers in oil-producing regions such as Alberta, where there has been a sharp rise in unemployment, leaving some struggling to repay debt.

 

Consumer delinquency rates soared by 25 percent in Canada's biggest oil-producing province last year and analysts say recent wildfires that put a major dent in production will make matters worse, although banks are extending forbearance for those directly affected.

 

"In Alberta we've seen a pick-up in delinquencies for credit cards as well as auto, I think everyone reported the same trend. You may see that flow through in the second half," said Fitch Senior Director Doriana Gamboa.