National Bank of Canada's shift away from being the lender of choice to junior oil companies was an unpleasant process, but it has provided the institution with stability in the energy sector, its chief executive officer says.
In fact, the Montreal-based bank's energy-lending portfolio is growing again, as larger and better-financed producers have sought new capital over the past two quarters, even as oil prices have stalled below $50 (U.S.) a barrel, CEO Louis Vachon said.
National Bank's repositioning in 2016 angered small-energy clients as they struggled with the industry downturn. Some were vocal in their criticism.
"We've been supporting the patch for 35 years," Mr. Vachon said in an interview. "We did transition away from a few accounts, and they were clearly not happy. But we're better positioned for the future, and I think our franchise keeps growing."
"I don't think there was significant damage to the reputation of the firm."
Faced with mounting loan losses and risks of more default, National Bank took a $250-million (Canadian) loss provision for the sector in 2016, a symptom of the commodity-price collapse that disrupted the Western Canadian economy. It reduced the number of small producers in its client base to concentrate on companies that have the financial strength to help them withstand the oil-price slide.
Meanwhile, the financial institution hired new investment bankers and an equity research analyst to make a similar transition to larger clients on the equity-financing and mergers- and- acquisitions end of the business.
Its losses in the industry have totalled about $100-million over two years. The move was a big change for National Bank, which long had a niche as key lender to oil patch startups and juniors, the ranks of which have since been depleted. Energy remains one of its largest lending segments.
Mr. Vachon said the industry's biggest risks are rising production costs in the mature western Canadian region, increasing environmental liabilities as regulators tighten their rules and the influence of the shale revolution on commodity prices.
"For those reasons, we want to have more resilient balance sheets and they tend to be with larger producers. We kept some of the small, but by and large we're moving now to medium-size and larger-size producers," he said.
His outlook is optimistic, even with forecasts for crude prices that vary widely between $40 (U.S.) and $55 a barrel.
"If you're efficient and profitable at these prices, then I think you have long-term resiliency in terms of your balance sheet. If we're wrong and it goes to $70 or $80, well, the people will go from making money to making a lot of money, which is a good thing."
The bank believes it would take a major, long-term disruption of production to push prices above $55 a barrel in the short term. Today, Mr. Vachon points out, even countries undergoing intense political upheaval, such as Syria and Venezuela, keep producing oil.
Meanwhile, a shift from fossil fuels to renewables is accelerating, but how quickly society adopts new sources will depend on technology, politics, price and other factors. Technology may in fact have slowed the transition, as it has reduced the cost of producing oil and gas in some parts of the world, he said.
Uncertainty over how long the shift will take is behind National Bank's decision not to stop lending money for pipeline projects, Mr. Vachon said.
Fellow Quebec financial institution Desjardins Group has made headlines for its moratorium on loans to pipeline projects on environmental grounds. It has said it will decide this month whether to make it permanent.
"[The transition] will occur in an orderly way over a period of time. That's how we're going to approach it," Mr. Vachon said.