Alberta’s energy slump is sparking fears about contagion spreading to the broader economy and the big banks, but Bank of Nova Scotia, the first major bank to report earnings for the quarter ended Oct. 31, says it is confident its loan book will withstand the commodity cycle.
During a conference call on Tuesday to discuss the bank’s fourth-quarter results, executives said the lender has been improving the quality of its energy loan book since the last oil-price crash, which saw North American benchmark oil prices drop from more than US$100 a barrel to about US$26. As a result, the bank is in a strong position to weather the challenges currently facing Canada’s oil patch, said Dieter Jentsch, Scotiabank’s head of global banking and markets.
“We feel very proud of the names that we bank,” Mr. Jentsch said. “They have a disciplined view of capital deployment – and look, I’m very confident that this will withstand a period of unsettlement in the commodities market.”
Alberta’s energy companies are being forced to accept a steep discount for their product, as a lack of pipeline capacity and refinery shutdowns in the United States have led to a surplus of oil and gas in the province. On Tuesday afternoon, Western Canadian Select was trading at $17.96 a barrel – $33.50 less than the U.S. benchmark, West Texas intermediate. That has led to concerns that Canada’s big banks could see their losses spike on commercial and consumer loans in Alberta.
But Mr. Jentsch told investors that the balance sheets of the companies in the bank’s loan book are stronger than ever and that their management teams are keeping costs in check. Scotiabank has roughly $14.8-billion of outstanding loans and acceptances to energy companies, and 64 per cent of that loan book is considered investment grade.
Daniel Moore, the bank’s chief risk officer, said Scotiabank is also keeping a close eye on unemployment in Alberta, although it has yet to see an uptick. (The province’s unemployment rate was 7.3 per cent in October.) He added that 93 per cent of its retail loans in Alberta are secured, which gives the bank comfort.
“We’ve been de-risking this book and paying close attention to the portfolio quality since 2016 and we never took our eyes off the road,” Mr. Moore said, highlighting the bank’s investments in collections and credit analytics. “Pro-active measures are paying dividends and they will continue to going forward.”
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