Bank towers are seen in the financial district in Toronto, January 28, 2013.MARK BLINCH/Reuters
Energy prices are tumbling, but Canada's banks remain largely unfazed.
After oil and gas prices started nose-diving last fall, the country's largest banks put on a calm public face, arguing they had stress-tested their portfolios and saw no reason to panic.
That same message was restated Wednesday, as bank chief executives take the stage at Royal Bank of Canada's annual industry conference. Yes, the energy slump's effect on the broader economy must be monitored, they say, but their loan books are in pretty solid shape.
"I don't think you're going to see any major negative credit risks" in 2015, Dave McKay, RBC's CEO, told the audience.
At RBC, energy lending comprises $9.6-billion of the bank's total loan portfolio. That may sound like a massive number, but it's only 2.1 per cent of the total book – and Mr. McKay noted that half of the loans are to utility companies.
The other Big Six banks are in roughly the same ballpark, with energy comprising approximately 3 per cent or less of their total loan exposure. Toronto-Dominion Bank is the least vulnerable to the sector, with energy loans accounting for just 0.7 per cent of its total lending portfolio.
As energy markets tumble, all of the banks stress-test their loan books at lower price estimates. Even when working $40 to $50 oil into their models, they say they aren't worried, though they point out that lenders with heavy exposure to the energy-services sector are at higher risk of losses. Whereas oil and gas producers continue to produce cash flow at lower energy prices, energy-services firms can quickly have their contracts cancelled.
"There will be a few anxious moments, particular in the services sector," Bank of Nova Scotia CEO Brian Porter said, adding that some "fender bender" loan losses will crop up in this segment.
Although some banks, particularly RBC, still have hefty undrawn credit lines, meaning energy companies have been granted approval to borrow money if they see fit, National Bank of Canada CEO Louis Vachon said energy companies have been loath to use them because they want to protect their balance sheets. Instead of borrowing more money, these firms would much rather sell assets or issue new shares, if possible, to raise cash.
Given these conditions, the hoopla today is "is highly sentiment-driven, and not so much fundamental [driven]," Bank of Montreal CEO Bill Downe said. "These [loan] portfolios have proven to be enormously resilient."
Canadian Imperial Bank of Commerce CEO Victor Dodig expressed similar thoughts. "We feel comfortable, but concerned," he said – comfortable about the strength of the loan book, but concerned about how the energy slump will affect the broader economy, as is the Bank of Canada.
Asked whether the banks should worry about the knock-on effects of an energy slump on their other lending portfolios, RBC's Mr. McKay said there isn't much reason to worry. Because credit cards carry such high interest rates, they have huge profit margins that can absorb any losses – RBC's loss rate is just 3 per cent, versus a 13-per-cent gross yield on its cards. Auto loans are secured by physical assets, such as cars and trucks.
Mortgages in Alberta are a particular concern, of course, but the banks stress that they have a lot of mortgage insurance. And some, such as BMO, have a healthy portfolio in the province. BMO's average mortgage loan-to-value ratio in Alberta is 57 per cent.
Although a weaker energy market can hurt, the hit to overall loan provisions and the profitability of the bank "have proven to be relatively moderate in the past, and I'm expecting the same thing" this time around, BMO's Mr. Downe said.
Plus, the banks have been pushing hard to cross-sell products over the past few years, and those that excel at it, such as RBC, often get early warnings when customers are in trouble. Because RBC can watch everything from payroll deposits to credit-card payments, they see much more than a credit bureau would.
"We have upwards to a year's notice when a customer could get into trouble," Mr. McKay said. "The farther you can get ahead of a problem, the more options you have."
Tim Kiladze