August 25, 2015 / 5:03 AM / 2 years ago

Canadian banks brace for impact from oil price selloff

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Cars drive by a Bank of Montreal branch in Toronto, March 5, 2013.Mark Blinch

TORONTO/OTTAWA (Reuters) - Canadian banks are expected to begin feeling the impact of an extended downturn in the energy sector as they exercise caution with new and existing loans to companies and individuals.

Investors will this week be poring over the balance sheets and bottom lines of the country's biggest lenders as they post third-quarter results, with Bank of Montreal kicking off the earnings party on Tuesday. Quarterly reports by RBC, TD Bank, CIBC and Scotiabank will follow.

A slowing Canadian economy and a battered energy industry have pulled the banking sector down 15 percent since it marked a high last November.

Some energy producers and service companies, hit by the dramatic decline in oil prices, are barely able to stay afloat. Clearly under enormous financial strain, they have been cutting costs and pulling back on production.

For their part, the banks are renegotiating covenants with energy companies. The options they have on the table include reducing borrowing capacity for clients and slowing the rate at which they give out loans - moves that could affect loan growth in the coming quarters.

"Banks are being a lot more cautious and are not lending significantly into an environment that is arguably likely to get choppier," said Edward Jones analyst James Shanahan. "You wouldn't want to see them doubling down on energy lending at a time like this, where cash flows and earnings are impaired."

The banks have exposure to the energy sector through consumer loans, corporate loans and capital markets.

"We would expect the biggest losses to be associated with the consumer loan portfolios in the oil-producing provinces of Alberta and Saskatchewan," said David Beattie, a senior vice president at Moody's Investors Service, who estimates overall aggregate losses for the six biggest banks due to oil prices could be about C$4.5 billion ($3.39 billion).

As part of loan discussions with lenders, Canadian energy companies are being nudged to cut costs and offload assets.

"The banks are making sure the companies are working hard at right-sizing their portfolios, selling assets where they can to repay the banks," said Jennifer Stevenson, portfolio manager at Dynamic Funds, who added the banks may also force companies into bankruptcies if loans are not repaid.

"Canada's banks are well positioned to manage the decline in oil prices," the Canadian Bankers Association said in a statement, noting that banks can reach out to impacted clients proactively, undertake stress tests and set aside provisions for credit losses.

Reporting by John Tilak and Leah Schnurr, editing by G Crosse

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