Canadian banks not over the worst impact from oil crunch

Fri Jun 3, 2016 12:48pm EDT
 
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By Matt Scuffham

TORONTO (Reuters) - Canada's banks are not over the worst of the impact from the oil crunch and face further hefty losses as energy firms struggle to pay back loans and consumers in oil-producing regions suffer, analysts and investors say.

The country's biggest five lenders, including Royal Bank of Canada (RY.TO: Quote), Toronto-Dominion Bank (TD.TO: Quote) and Bank of Nova Scotia (BNS.TO: Quote), 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 BMO.TO 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.   Continued...

 
A woman leaves a Bank of Nova Scotia (Scotiabank) branch in Ottawa, Ontario, Canada, May 31, 2016. REUTERS/Chris Wattie