Skip to main content
The Globe and Mail
Get full access to globeandmail.com
Support quality journalism
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
The Globe and Mail
Support quality journalism
Get full access to globeandmail.com
Globe and Mail website displayed on various devices
Just$1.99
per week
for the first 24 weeks

var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){console.log("scroll");var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))}pencilInit(".js-sub-pencil",!1);

An oil worker holds raw oilsands near Fort McMurray, Alta., on July 9, 2008. The chief economists of some of Canada's biggest banks say the country is headed for a rocky year as low oil prices continue to drag on economic performance.

Jeff McIntosh/THE CANADIAN PRESS

Oil is going to be a hot topic among bank executives this year – and the conversation will likely get started on Tuesday at the Canadian Bank CEO Conference.

Consider the urgency: The price of oil – exploring 12-year lows – is fast-approaching worst-case hypothetical scenarios used in bank stress tests in 2015, raising concerns about whether loan losses will spike as energy companies fail to meet their debt obligations. Big Six loans to the oil and gas sector total nearly $113-billion.

Analysts peppered bank executives with questions about their exposure to the sector during the first-quarter earnings calls early last year, as they tried to get a handle on the extent to which tumbling oil prices would affect loans to Canadian energy companies. Bank executives responded with reassurances that credit quality was strong.

Story continues below advertisement

But those were innocent days. At the time, oil traded at about $50 (U.S.) a barrel. On Monday, it slid close to $31 a barrel, down more than $2.

The lower prices are nearing, or passing through, some significant thresholds. Canadian Imperial Bank of Commerce used $30 oil in its stress tests a year ago; Bank of Montreal stress-tested its loan portfolio at $35 a barrel in 2015, and assumed that oil would recover to $50 a barrel this year.

Back in February, BMO chief financial officer Tom Flynn sounded optimistic. "We're not expecting a big storm," he said during a conference call with analysts. "Clearly, parts of the country are adjusting to the lower price of oil, and there will be some credit losses there, but we're not seeing signs of those yet, and we don't expect them to be problematic."

He was right: Concerns about oil largely died down in 2015 as the price of oil appeared to stabilize and the big banks continued to report strong profits and relatively mild credit losses. BMO ended its fiscal year with provision for credit losses at just $128-million, down from $170-million in the fourth quarter of 2014.

But as a potential flashpoint, oil is back. In a note released earlier this month – when oil was 10 per cent higher than it is today – CIBC World Markets analyst Robert Sedran noted that the indirect exposure to depressed oil prices, through delinquent consumer mortgages and loans, could be a bigger concern than direct loans.

"The concern surrounding retail delinquencies (mortgages, auto, credit cards) in the oil-exporting provinces is more acute given its unpredictability," he said.

In the case of uninsured Alberta real estate loans, he estimates that a 115-basis-point loss rate (there are 100 basis points in a percentage point) would cut 2016 profits for the Big Six by 1.6 per cent; a 165-basis-point loss rate would cut profits by 2.4 per cent.

Story continues below advertisement

The indirect impact could spread well beyond Alberta, though. Mr. Sedran calculated that a 5-per-cent default rate for corporate and government loans outside the energy sector would hit bank earnings by another 2.4 per cent.

"While it was always going to take time for the negative impact of lower oil prices to begin to show in bank results, the continued strong credit performance in fiscal 2015 was nevertheless a noteworthy positive," he said. "That same upside is harder to see at this point," adding that credit quality will be one of the most discussed themes this year.

And the discussion will likely start on Tuesday at the CEO conference.

Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies