Canada's banks to set aside more funds to cover toxic oil loans

Fri May 20, 2016 11:12am EDT
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* Provisions expected to increase in second quarter

* Expected losses to reflect recent redeterminations

* Two banks have hiked provisions ahead of results

By Matt Scuffham

TORONTO, May 20 (Reuters) - Canada's biggest banks are expected to set aside more funds to cover bad loans to the oil and gas sector, eating into their profits when they announce second quarter results next week, analysts say.

Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce all reported an increase in losses from oil sector loans that turned sour in the first quarter.

Although oil prices have improved since February, the banks' second-quarter results will show the impact of credit lines to oil firms being tightened to reflect lower oil prices, a move that could lead some to default on their loans, analysts say.

The situation is likely to have been exacerbated by the impact of the Alberta wildfires, which has led to several producers being unable to fulfill supply contracts.

"We believe that provisions are going to increase in the second quarter for the Canadian banks. I think it's likely going to reflect the redeterminations that just took place," said Fitch Senior Director Doriana Gamboa.   Continued...