The plunging value of crude oil has beat up energy stocks and halted new projects, but Canadian lenders say their loan portfolios and investment banks can withstand even a prolonged dip in oil prices.
The North American benchmark West Texas Intermediate has spiralled down more than 35 per cent, from $102 at this year's peak on June 25 to a low of less than $66 when the markets closed on Friday.
All six of the country's largest banks addressed concerns about the impact of the price squeeze as they reported earnings in the first week of December. Executives were confident in their ability to manage ties to the sector, but had mixed views on the likely economic impact of falling prices.
The Bank of Nova Scotia's frequent stress tests, engineers' reviews and updated market pricing assumptions all reassured management of the quality of oil-related loans. Part of that conviction comes from the dip in oil prices a few years ago, said Stephen Hart, chief risk officer at Scotiabank. "When oil prices were in the $40 (Canadian) range back in 2009, our loan losses were zero," he said in a conference call with analysts.
The bank's loans to oil and gas companies rose to $12.8-billion, or three per cent of the total portfolio as of the end of the company's fourth quarter, up from $10.4-billion at the same time last year.
For Royal Bank of Canada, the price of oil is now one of the areas of stress testing for "early warning signs of credit deterioration" along with a downturn in the housing market, uptick in unemployment and low interest rates, according to chief risk officer Mark Hughes. He said that low prices for at least two years is within the bank's "overall risk appetite."
However, while the loans themselves appear stable, the lenders' Investment banking businesses may suffer as oil companies reel. Bob Dorrance, group head of wholesale banking at Toronto-Dominion Bank, said activity levels are down. "I would expect that until oil starts to establish a range wherein businesses can plan around what their activities would be, it will probably remain slow until that time," he said in a conference call.
In an October note to clients, Scotia Capital analyst Sumit Malhotra considered the impact of falling oil prices and concluded that energy exposure would affect investment banking businesses more than loans. "Though the capital market units of the banks are much more diversified than those of the independents... softness in the crude quote can very quickly impact the ability or willingness of issuers to come to market," he wrote.
Bank executives also questioned the longer-term impact of low prices.
"If we have a short duration of a rapid decline in prices, it's manageable. It's really a sustained period of decline that would be more challenging for our clients," said Laura Dottori-Attanasio, chief risk officer at Canadian Imperial Bank of Commerce. CIBC has oil and gas loans in Canada and abroad of $5.2-billion, or 8 per cent of the bank's business loans.
CIBC's Ms. Dottori-Attanasio said the services sector tends to get hit first in such downturns. Other banks expressed similar concerns over weaknesses in this sector.
And while the pain of lower oil prices is being felt in Alberta, other industries and retail consumers may benefit from the decline, which could ultimately benefit the banks.
"Our franchise is national... so if there is a problem with oil, I'm sure there will be more of a regional story than perhaps as big a national story," said Bharat Masrani, chief executive of TD, on the company's conference call. "And given the size of our business, the diversity of our business, you would think there would be offsets elsewhere in our business."
The link between oil prices and movement in the Canadian dollar could also be a benefit for oil companies. "That provides a natural hedge for some of the costs that the Canadian producers have. So that plays out as a positive," said Surjit Rajpal, chief risk officer at Bank of Montreal, adding that two thirds of the bank's $5.9-billion oil and gas loan book is Canadian. "When the prices first started dropping, most people thought it was a shock. It was called the 'oil shock.' But are they going to be sustained down there? One doesn't know."