February 22, 2016 / 6:48 PM / 2 years ago

Moody's warns on top Canadian banks; smaller rivals feeling the heat

TORONTO, Feb 22 (Reuters) - Moody’s warned on Monday that the oil price slump will strain profitability at Canada’s largest banks, which begin reporting results this week, however analysts expect regional banks will feel the brunt of the pain as the energy-rich province of Alberta reels from the downturn.

The rating agency said under its severe stress scenario some of the country’s big six - Royal Bank of Canada, Toronto Dominion, Bank of Nova Scotia, Bank of Montreal , CIBC and National Bank of Canada, may be required to take capital conservation measures, cut dividends or raise additional equity.

“There’s going to be additional pressure on bank earnings in 2016,” said Barclays analyst John Aiken. “The banks and economy aren’t going to be able to sidestep most of the damage.”

Analysts expect the diversified portfolios of the big six to shelter them somewhat, but with oil dipping below $30 this year, smaller players like Edmonton-based ATB Financial and Canadian Western Bank are expected to report the biggest increases in provisions for credit losses given their outsized exposure in Alberta.

The worry is the oil rout will hit mortgages, auto loans and credit card debt of consumers, especially in Alberta.

“When Alberta’s doing well we have a tailwind and when it is hurting, we face a headwind for sure,” said ATB Chief Executive Dave Mowat, who sees the bank’s loan loss provisions potentially tripling this year, albeit off a very low base.

Some fear losses could mount as Alberta is one of the only provinces to offer non-recourse mortgages; loans that are not compulsorily insured up-front as they have at least 20 percent cash paid down.

Non-recourse loans allow borrowers to give up their homes and walk away from their loans, without the lenders being able to seize their other assets, as lenders can in most other parts of the country.

DIRECT EXPOSURE

ATB, a crown corporation owned by the province of Alberta, has overall direct loan book exposure to the energy patch of around 6 or 7 percent, while the direct exposure of its rival Canadian Western stands at about 5 percent.

In comparison, the big six Canadian banks have exposure that ranges from 0.9 percent to 3.5 percent, while energy exposure at the six biggest U.S. banks ranges from 1.6 percent to 5 percent.

Besides the direct loan exposure to the energy sector, the two regional banks’ larger concentration of their overall lending books in Alberta is a concern. Alberta’s jobless rate last month hit its highest since 1996.

Chris Fowler, chief executive of Canadian Western Bank, said lower growth in Alberta would hurt the company’s earnings, but noted the bank does have a bit of a buffer from the job losses across the province.

“Being a commercially focused bank, we are less impacted by unemployment,” he said, citing the bank’s focus on corporate versus consumer lending.

Still, Canadian Western’s shares have nearly halved in value since peaking in 2014, and with 48 percent of its loan portfolio centered around Alberta and Saskatchewan, the bank’s provisions for credit losses will move higher, warned Credit Suisse analyst Kevin Choquette, in a recent note.

Editing by Tom Brown

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