Three of Canada's biggest banks delivered a notable shift in tone after the price of crude oil rebounded to its highest level in 10 months, easing concerns about loan losses to the energy sector.
Oil touched $50 (U.S.) a barrel early on Thursday, up from just $26 as recently as February, putting it well above the price used in the banks' worst-case stress tests and nearing the point at which stability could return to the struggling energy sector.
"That is very encouraging for the Canadian economy over all and the oil-impacted areas," said Riaz Ahmed, chief financial officer at Toronto-Dominion Bank.
Although he cautioned that oil's rebound is unlikely to have an immediate impact on the financial health of energy companies, the fact that some bank executives are now entertaining a more upbeat outlook marks a notable departure from the gloom that has hung over the sector.
Earlier this month, National Bank of Canada and Canadian Western Bank warned of sharply higher losses tied to their energy loan portfolios, raising concerns that loan losses could have a meaningful impact on bank profits.
To be sure, bank executives have not sounded the all-clear signal, with the price of crude oil still well below $100 a barrel, where it traded in 2014 before its dramatic fall.
"We're still in low-oil-price territory," said Janice Fukakusa, Royal Bank of Canada's chief financial officer.
Similarly, Laura Dottori-Attanasio, chief risk officer at Canadian Imperial Bank of Commerce, cautioned that the price of oil would have to rise above $55 a barrel – or another 10 per cent – and stay there for a year before energy companies start to reinvest in their operations.
However, she suggested that the worst may be over in terms of companies failing to meet their loan obligations. CIBC added just one name to its so-called watch list of struggling companies in the second quarter, down from nine names previously.
The optimistic comments follow a flurry of second-quarter financial reports from RBC, TD and CIBC on Thursday – all of which showed that profit growth is continuing despite rising provisions against bad loans.
CIBC set aside $284-million (Canadian) to cover bad loans in the second quarter – a period in which oil prices fell to 12-year lows – up 47 per cent from the previous quarter.
RBC set aside $460-million, up 12 per cent, although provisions tied specifically to the oil and gas sector rose just 8 per cent to $115-million.
"Although we saw credit weakness in oil-exposed regions this quarter, this was partly offset by relatively benign credit conditions in other Canadian markets, including Ontario and B.C., explained in part by the low unemployment rate," Dave McKay, RBC's chief executive officer, said in a call with analysts.
TD set aside $584-million, down from the previous quarter. However, its provisions for energy companies and pipelines more than quadrupled, to $49-million.
The rising loan losses were largely in line with analysts' expectations and follow similarly upbeat results from Bank of Montreal on Wednesday.
RBC said its second-quarter profit rose to nearly $2.6-billion, up 3 per cent from last year. Profit from its personal and commercial banking division increased 8 per cent to about $1.3-billion.
Profit from the lender's wealth management division, which now includes its recent acquisition of Los Angeles-based City National Bank, rose 42 per cent to $386-million.
TD's profit totalled nearly $2.1-billion in the second quarter, up 10 per cent from last year. Profit from its Canadian retail division climbed 2 per cent to $1.5-billion. Its U.S. retail division reported a profit of $719-million, up 20 per cent from last year with help from the stronger U.S. dollar.
CIBC's profit came in at $941-million, up 3 per cent from last year, and the bank raised its dividend for the seventh consecutive quarter to $1.21 a share, up 3 cents from the previous quarter. Its retail and business banking division reported a profit of $652-million, up 12 per cent.
Analyst warns BoC optimism misplaced
The Bank of Canada is being overoptimistic in counting on an economic rebound that is unlikely to come, raising the risk policy makers will be forced to cut rates before year-end, some market players warned on Thursday. In holding rates steady on Wednesday, the Canadian central bank pointed to expectations for a return to solid U.S. growth and a bounce-back in third-quarter Canadian growth.
But structural change means Canada no longer gets as much traction from U.S. demand that it once did, said David Madani, economist at Capital Economics, who added that a lack of business confidence and a flagging housing market point to a September rate cut.
"The economy will be lucky to grow by 1 per cent this year," Mr. Madani said. "It is wishful thinking that the economy is going to rebound strongly."
Most analysts polled by Reuters expect the next BoC move to be a hike, not a cut. Overnight index swaps imply just a 5-per-cent chance of a rate cut this year.
But the central bank proved itself willing to surprise with a rate cut almost no one saw coming in January, 2015. At the time, Governor Stephen Poloz said the benefit of acting swiftly "outweighed the costs of any short-term market volatility."
While he eschews forward guidance, Mr. Poloz said in April the bank would probably have considered cutting rates again, if not for fiscal stimulus pledged by the new Liberal government. Many took that as a sign the bank would stay on the sidelines.
But David Watt, chief economist at HSBC Bank Canada, said the BoC will have to cut rates before year-end because counting on the United States, Canada's largest trading partner, to pull the economy out of the ditch no longer works as it once did.