Oil shock seen hitting Canadian bank profits in 2016

Mon Jan 18, 2016 1:16pm EST
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By Euan Rocha and John Tilak

TORONTO (Reuters) - The knock-on effect of sinking oil prices is expected to take a bigger bite out of Canadian bank profits in 2016, as more corporate loans sour, oil and gas capital raising dries up and job losses take a toll on banks' consumer arms.

Canada's big six lenders reported profit growth of 6 percent on average last year, even as falling oil triggered a shallow recession. International operations and aggressive cost cuts underpinned results.

Bank executives have emphasized that their direct exposure to loan losses in the energy patch is minimal.

But analysts and investors see a high risk the oil price rout will have a broader ripple effect on the banks' other businesses, as struggling customers in Western and Atlantic Canada default on more mortgages, auto loans and credit card debt.

"They're all making pretty bold statements about how their portfolios are positioned. They could be wrong," said Edward Jones analyst James Shanahan.

Macquarie analyst Jason Bilodeau expects just 1.3 percent earnings growth this year.

Banks will also confront declining revenue from underwriting and capital markets activities as their oil and gas clients cut spending, according to Moody's analyst David Beattie.

These concerns pushed CIBC analyst Robert Sedran to cut his price targets on the six Canadian banks. He warned earnings in the banks' Canadian personal and commercial segments could slide 11 percent on average in fiscal 2016.   Continued...