Canadian Western Bank profit tumbles on higher loan loss provisions

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Canadian Western Bank reported a sharp drop in its quarterly profit but suggested that it would stay profitable even if low oil prices persist amid a weak economy.

"Based on the results of stress tests simulating severe economic conditions in Alberta and Saskatchewan … management is confident CWB will continue to deliver positive earnings for shareholders while maintaining financial stability and a strong capital position," Canadian Western Bank said in a statement.

The Edmonton-based bank, seen as the lender most vulnerable to deteriorating economic conditions in oil-producing provinces following a dramatic drop in the price of crude oil over the past two years, said that its profit fell 37 per cent year-over-year in the second quarter, to $32.2-million.

The decline was driven by surging loan loss provisions, after the bank set aside $39.7-million to cover bad loans – largely to the energy sector – during the second quarter, a fivefold increase from provisions of $7.4-million in the same quarter last year. The price of oil fell to a 12-year low of about $26 (U.S) a barrel in February, but has since rebounded to close to $50.

"We continue to see credit quality as the biggest risk for CWB," Darko Mihelic, an analyst at RBC Dominion Securities, said in a note. "The longer economic weakness persists in Alberta the more likely credit quality deteriorates in other industries."

Other Canadian lenders have also reported rising loan losses in their second-quarter results, but the big banks are more diversified across business lines and markets, and have a relatively lower exposure to energy companies and the Alberta economy.

CWB said that its loans to the energy industry stand at about 5 per cent of its total loans, which is more than double the average exposure of the Big Six banks.

A number of big lenders have suggested that their loan losses will decline in subsequent quarters due to rising confidence in the quality of their loan books and stronger oil prices.

CWB didn't go that far, but it stressed that its own diversification efforts, along with stable business conditions beyond the energy patch, would keep it profitable even if low oil prices and slow economic activity persist for another three years.

"Although we expect further increases in the balance of impaired loans across the portfolio, we anticipate loss rates on impaired loans outside of oil and gas production lending to be more consistent with our prior experience, reflecting the combined positive impact of our disciplined underwriting, secured lending practices and proactive account management," the bank said.

Without the charges related to bad loans and before taxes, CWB said that its adjusted profit rose to $84.5-million, up 8 per cent from last year.