August 22, 2016 / 2:07 PM / in a year

Canadian banks brace for more oil loan losses in latest quarter

TORONTO, Aug 22 (Reuters) - Canada's biggest banks are set to report another increase in losses from loans to oil and gas firms in the latest quarter, while concerns about inflated house prices threaten to cloud their future prospects.

Bank of Montreal will be the first major Canadian bank to report third-quarter results on Tuesday, followed by Royal Bank of Canada, Toronto-Dominion Bank, and Canadian Imperial Bank of Commerce. Bank of Nova Scotia reports next week.

The banks are expected to say that losses from loans to oil companies have risen sharply from the same period a year ago. However, a partial recovery in oil prices during the quarter may see some lenders reduce funds set aside to cover future losses.

Margins are expected to have come under more pressure, with some banks focusing on cost cutting measures to maintain profitability. Bank of Montreal announced plans in May to cut its workforce by 4 percent.

"We expect broadly flat margins in the quarter, and continued elevated provisions driven by low oil prices. We expect investors to be focused on both these metrics," Citi analysts said in a research note.

The banks all reported an increase in funds set aside to cover losses to energy clients in the first half of 2016 and warned of further losses in the coming quarters.

Canada's banks are also facing heightened scrutiny of their mortgage underwriting practices as Canadian authorities look to tackle the potential threat of a housing bubble in Vancouver and Toronto, where prices have soared.

Canada's banking regulator in July moved to tighten oversight of mortgage lending, citing concerns over record household debt and the sharp jump in prices. The regulator has also asked smaller lenders to test their resilience to sharp drops in house prices in Vancouver and Toronto.

National Bank analyst Peter Routledge says the household credit risk represents the primary threat to the performance of Canadian banks.

"We believe falling home prices would trigger a spike in loan losses, not from residential mortgage lending, but rather from unsecured household debt and household loans secured by other collateral," he said.

The last quarter, which covered the three months to the end of June, also included the impact from the Alberta wildfires, which contributed to a 0.6 percent fall in Canada's gross domestic product during May. (Reporting by Matt Scuffham; Editing by Paul Simao)

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