TORONTO — Canadian banks boosted oil and gas lending at about double the rate of total business loan growth over the past three quarters, raising the spectre of higher loan losses after Monday’s oil price crash.
Energy lending has picked up at Canada’s top banks even as bad loans and provisions for losses from the sector climbed, an analysis of company data by Edward Jones and Reuters shows.
Oil prices rebounded nearly 8 per cent on Tuesday, following Monday’s slide of more than 20 per cent on fears of a price war after Saudi Arabia and Russia said over the weekend they would raise oil production. Technical analysts said prices may be consolidating in a lower range.
“The developments (over the) weekend … are certainly negative for any banks that made loans to borrowers in oil and gas,” said James Shanahan, an analyst at Edward Jones. “I definitely see an increase in loan losses.”
Banks’ energy-related credit-loss provisions have climbed to the highest levels since 2016, while bad loans hit the highest in over two years in late 2019. The Canadian bank sub-index rose 0.9 per cent by Tuesday afternoon, after Monday’s 11.2 per cent decline.
Impairments at 2015-16 levels would hit banks’ earnings per share by 2 per cent to 6 per cent, depending on the severity of losses, Gabriel Dechaine, National Bank Financial analyst wrote in a note.
Bank of Montreal, TD Bank and Royal Bank of Canada have led growth in oil and gas lending over the past three quarters.
Oil and gas loan impairments across Canada’s banks were about 1.7 per cent in the first quarter compared with 0.69 per cent across all business loans, according to data from Scotiabank analyst Sumit Malhotra.
While that is down from a 6 per cent peak in 2016, “another reset lower on prices just puts pressure on the banks,” Malhotra said.
Banks were already bracing for margin pressures after Canadian and U.S. central banks last week cut interest rates by 50 basis points in response to the coronavirus outbreak.
Canadian banks’ energy loans grew 16 per cent in the quarter ended Jan. 31 from a year earlier, compared with 9 per cent in total business and government lending. That followed 25 per cent and 26 per cent growth in the prior two quarters, versus 11 per cent and 13 per cent overall.
Lending activity rose following a “prolonged period” of very low write-offs on oil and gas loans, Edward Jones’ Shanahan said.
That pared some of the banks’ longer-term pullback from energy lending, with the loans accounting for about 5 per cent of commercial loans, down from 6.3 per cent five years ago, but up from 4.5 per cent in 2018.
A BMO spokeswoman directed Reuters to Chief Risk Officer Patrick Cronin’s comments in January that overall lending-book credit quality remained sound. BMO, whose proportion of energy loans remains in line with the industry average, attributed some of the growth to the acquisition of US$3 billion of loans from Deutsche Bank in 2018.
Bank of Nova Scotia and Canadian Imperial Bank of Commerce had the biggest proportion of oil and gas loans relative to total commercial loans, at 7.1 per cent and 6.6 per cent respectively. Still, Scotiabank’s energy loans account for 2.7 per cent of total lending, down from 3.6 per cent in 2016, and most of them are investment grade, a spokeswoman said.
An RBC spokesman said the bank’s energy loans accounted for only 1.3 per cent of total lending.
“A stable economy requires stable energy prices,” RBC CEO Dave McKay said at a conference on Tuesday.
“To stop doing certain things we do today undermines the stability of energy, the stability of our economy. And it undermines our ability to make this critical transition.”
TD, CIBC and National Bank of Canada spokespeople declined comment.
Mark Naron, director at Fitch Ratings, expects higher energy-related provisions and impairments. “I don’t think it’s easy for Canadian banks to fully step away.”
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