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TORONTO (Reuters) - Canada's biggest banks warned on Thursday of further losses from oil loans in coming quarters as energy companies struggled to repay loans, even as growth in wealth management and retail banking helped the banks report better-than-expected second-quarter earnings.
Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO) and Canadian Imperial Bank of Commerce (CM.TO) each posted sharp increases in impaired oil and gas loans as some energy clients battled the oil market slump. Crude prices fell to a 13-year low of $26 a barrel in February on concerns about an oversupply.
TD's chief financial officer, Riaz Ahmed, said that despite a recent recovery in oil prices, which tested $50 a barrel on Thursday, he expected the bank to set aside more funds to cover bad energy loans this year and next. [O/R]
"While it is encouraging that oil prices are rallying nicely, I don't expect that to have an immediate impact. I expect that through 2016 and 2017 we will continue to see credit provisions relating to the oil and gas sector materialize," he said.
David Cockfield, managing director of Northland Wealth Management, which owns shares in Bank of Montreal (BMO.TO), Bank of Nova Scotia (BNS.TO) and TD, said he expected provisions to rise further but that share prices already reflected that.
"I believe it will get worse before it gets better. I think they're going to have to continue to make provisions in the next quarter. Even oil prices moving back into the $50 level isn't going to float all the guys that have difficulties right now," he said.
RBC said impaired loans to oil and gas firms more than tripled to over C$1 billion during the quarter, with provisions for credit losses rising to the upper end of its guidance of 30 to 35 basis points of total loans.
"I think that it's probably more of the same for the rest of the year given where we are," Chief Financial Officer Janice Fukakusa told Reuters.
Despite the warnings, RBC, TD and CIBC each reported second-quarter profit ahead of expectations.
The banks said the Alberta wildfires would not have a material impact on their earnings.
Ahmed said he estimated the impact on TD, which is one of the biggest property insurers in the region, would be "less than 5 cents per share over time".
RBC and TD shares closed up 1 percent and 0.1 percent respectively. CIBC shares were down 1 percent.
Additional reporting by Anet Josline Pinto in Bengaluru; Editing by Chizu Nomiyama and Peter Cooney