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Alberta’s energy rout is expected to be front and centre as Canada’s biggest banks report their fourth-quarter earnings over the next two weeks.

Falling oil and gas prices and the differential between U.S. and Canadian benchmarks is expected to create headwinds for Canada’s banks, although some will be affected more than others.

The Bank of Nova Scotia, which kicks off the earnings parade on Tuesday, and the Canadian Imperial Bank of Commerce, which reports on Thursday, may have the highest exposure to the sector, according to a new report by RBC analyst Darko Mihelic.

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Analysts will not only be looking at each bank’s direct exposure to the sector, such as the likelihood that loans to oil and gas producers could sour. They’ll also be studying how the possible contagion could spread to other areas of the economy, affecting everything from credit card loans to mortgages to consumer spending.

Although the price of U.S. benchmark oil has recovered somewhat from 2016 lows, the Canadian energy sector continues to lag, as a lack of pipeline capacity and refinery shutdowns in the United States are forcing Western Canadian producers to accept steep discounts for their oil and gas.

The gap between West Texas Intermediate and Western Canadian Select oil widened significantly in the fourth quarter, with WTI declining by 5 per cent while WCS dropped by 44 per cent.

Meanwhile the spread between Canadian natural gas and U.S. natural gas prices has more than doubled, according to the report.

Toronto-Dominion Bank, which will also announce its results on Thursday, has the lowest exposure to Canadian oil and gas, Mr. Mihelic wrote. The Bank of Montreal and National Bank both have large energy-sector loan books but more limited exposure to personal loans in Alberta. BMO will report on Dec. 4 and National Bank will follow on Dec. 5. RBC, which reports on Wednesday, was not discussed at length in the report.

“We think ‘conservative’ provisioning behaviours in Q4 will be rewarded by the market given the recent decline in oil and gas prices/widening differentials,” Mr. Mihelic wrote. “However, details matter and it will be quite interesting to see how banks communicate their exposures."

Back in 2016, plummeting energy prices were also the central focus during the banks’ earnings calls.

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The banks provided helpful disclosure around their oil and gas exposure at the time, Mr. Mihelic said. But given the much larger differential between U.S. and Canadian prices and the adoption of new accounting standards, that disclosure is now outdated, he added.

The new International Financial Reporting Standards 9 accounting standard, which was introduced just more than a year ago, puts more emphasis on banks' expected losses over the life of a loan. It is expected to make provisions for credit losses − the money that banks set aside to cover bad loans − more volatile.

“If banks' outlooks are negatively revised to incorporate the potential impact of sustained low oil prices, we expect to see higher provisions for credit losses,” the report said.

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