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 Investors will this week be poring over the balance sheets and
bottom lines of the country's biggest lenders as they post
third-quarter results, with Bank of Montreal kicking off the
earnings party on Tuesday. Quarterly reports by RBC, TD Bank, CIBC
and Scotiabank will follow.
A slowing Canadian economy and a battered energy industry have
pulled the banking sector down 15 percent since it marked a high
last November.
Some energy producers and service companies, hit by the dramatic
decline in oil prices, are barely able to stay afloat. Clearly under
enormous financial strain, they have been cutting costs and pulling
back on production.
For their part, the banks are renegotiating covenants with energy
companies. The options they have on the table include reducing
borrowing capacity for clients and slowing the rate at which they
give out loans - moves that could affect loan growth in the coming
quarters.
"Banks are being a lot more cautious and are not lending
significantly into an environment that is arguably likely to get
choppier," said Edward Jones analyst James Shanahan. "You wouldn't
want to see them doubling down on energy lending at a time like
this, where cash flows and earnings are impaired."
The banks have exposure to the energy sector through consumer loans,
corporate loans and capital markets.
"We would expect the biggest losses to be associated with the
consumer loan portfolios in the oil-producing provinces of Alberta
and Saskatchewan," said David Beattie, a senior vice president at
Moody's Investors Service, who estimates overall aggregate losses
for the six biggest banks due to oil prices could be about C$4.5
billion ($3.39 billion).
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As part of loan discussions with lenders, Canadian energy companies
are being nudged to cut costs and offload assets.
"The banks are making sure the companies are working hard at
right-sizing their portfolios, selling assets where they can to
repay the banks," said Jennifer Stevenson, portfolio manager at
Dynamic Funds, who added the banks may also force companies into
bankruptcies if loans are not repaid.
"Canada's banks are well positioned to manage the decline in oil
prices," the Canadian Bankers Association said in a statement,
noting that banks can reach out to impacted clients proactively,
undertake stress tests and set aside provisions for credit losses.
(Reporting by John Tilak and Leah Schnurr, editing by G Crosse)
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