Canada's depressed energy sector is emerging as a contentious topic during the big banks' first-quarter reporting season, with bank executives maintaining a calm outlook on loans to the sector and analysts pressing them over whether they are being too optimistic.
"As you know, the persistence of low oil prices led oil-producing provinces into a severe economic slowdown," Louis Vachon, National Bank of Canada's chief executive officer, said in a conference call with analysts.
"That being said, I'd like to remind everyone that our exposure to consumers and small-business loans in the oil regions of Canada remains low, and manageable."
Analysts probed executives about these reassurances after National Bank and Bank of Montreal reported their results on Tuesday, with questions that reflected long-simmering concerns about whether banks are being too optimistic.
The price of crude oil has fallen about 50 per cent since the summer, weighing on the Canadian economy and affecting the credit ratings of energy companies.
Last week, Moody's Investors Service downgraded the debt of Cenovus Energy Inc. and Encana Corp. by three notches, or two notches below investment grade, underlining the severity of the issue and their banks' exposure to it.
U.S. banks have raised their provisions against bad loans to the energy sector, by 70 per cent in the case of Wells Fargo & Co., prompting a heated exchange between an analyst and National Bank over why Canadian banks have been reporting considerably lower provisions.
"There has been a good amount of speculation – I've heard this mostly from international investors – that the Canadian banks have a propensity to be a lot more accommodating with their borrowers as it relates to covenants," Mario Mendonca, an analyst at TD Securities, said. "To what extent is that a reasonable thing to suggest?"
Mr. Vachon responded that the investors were "short sellers."
"But it's a simple question," Mr. Mendonca said. "International investors have made that claim, and I'm trying to test whether it's a sensible claim or not."
"No, I don't recognize what you're describing," Mr. Vachon said.
The exchange contrasted with a relatively upbeat start to the reporting season, in terms of profits.
Bank of Montreal reported that its profit rose to nearly $1.1-billion in the first quarter, up 7 per cent from last year.
While the results were helped by a 31-per-cent surge in profit from BMO's U.S. personal and commercial banking division, due largely to the strong U.S. dollar, profit from Canadian personal and commercial banking rose 5 per cent.
National Bank said that its profit fell to $261-million, down 37 per cent from last year. After accounting for a recent writedown in its investment in Maple Financial Group, though, National Bank's adjusted profit rose 4 per cent, to $427-million.
However, many analysts are wondering whether profits will deteriorate over the course of 2016 as corporate loan losses rise and potentially spill over into consumer mortgages and credit-card balances in oil-producing provinces.
National Bank said its provision for credit losses (PCLs) during the first quarter rose to $63-million, up nearly 17 per cent from last year. However, these provisions amounted to just 0.21 per cent of its total loans, which is low.
Bill Bonnell, National Bank's executive vice-president of risk management, said that PCLs will likely rise to between 0.25 per cent and 0.35 per cent in 2016, or as high as 0.4 per cent under "more stressed price scenarios." He described these scenarios as "manageable."
BMO said its PCLs rose to $183-million, up $20-million from last year. That also represents 0.21 per cent of loans, which is unchanged from last year.
In a conference call, BMO said its PCLs would remain below 0.3 per cent, even if low oil prices persist in 2016. If oil stays low for another two years, then PCLs would rise to a range between 0.35 per cent and 0.4 per cent, which is close to the long-term average for credit losses.
"I think the credibility with respect to Canadian banks should be high," Bill Downe, BMO's CEO, said in an interview.
"We have long experience and capable people, and I think we understand the sector very well."