How hard will oil patch woes hit bank earnings?
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Feb 22, 2016  |  Vote 0    0

How hard will oil patch woes hit bank earnings?

As Canada's big banks begin reporting their quarterly earning, the big question is how much the oil slump is hurting them

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The Big Five

Bank of Montreal’s results are expected to look good compared to the year earlier period, which included a charge against earnings on its insurance business.

Royal Bank of Canada has the largest volume of consumer loans in the energy-dependent provinces.

TD Bank is expected to be the top performer of the group. It’s the least exposed to loans in oil and gas exploration and development, and also to consumer loans in those provinces as it has fewer branches in western Canada.

CIBC is seen at higher risk due to its exposure to loans in oil and gas exploration and development, and its heavier reliance on capital market activities.

Bank of Nova Scotia faces higher risks from its corporate loan book and its higher exposure to oilfield services, such as drilling rigs.

OurWindsor.Ca

The prolonged slump in the price of oil and rising unemployment in western Canada, is expected to weigh on Canada’s biggest banks as they begin reporting their first quarter results Tuesday.

But there’s little consensus about how much of an impact. But, since many Canadians invest in the banks directly, in mutual funds, or through their pension funds, bank results are closely watched.

Moody’s Investors Service said in a report the worst case is that some banks could cut their dividends or sell more shares if the oil slump continues. But other analysts say the big banks can shake off the impact and may announce modest dividend increases this week.

Even Moody’s admits the likelihood of dividend cuts is remote, noting the banks would want to avoid taking such drastic action except under extreme circumstances.

“I just can't imagine what the investment community would do if the Canadian banks cut their dividends. The market would freak out,” said Jim Shanahan, senior analyst with Edward Jones.

Still, with oil prices plunging to lows last seen more than a decade ago, and remaining there far longer than expected, the banks are bound to feel the impact, the ratings agency and other financial analysts said.

“I don’t know if it all be doom and gloom. I don't expect a lot of bright spots,” Shanahan said in an interview.

Moody’s noted in its report that the slump in oil prices will increase the financial stress on oil producers, drillers and service companies that support them. It will also affect consumers in oil-producing provinces and so the banks’ losses in related areas will increase.

Analysts said they’ll be watching for signs the banks have increased their loan loss provisions.

The degree will vary depending on how heavily the bank is exposed to oil and gas industry loans and to consumer loans in the energy-dependent provinces where unemployment rates have spiked.

Alberta’s jobless rate has jumped to 7.4 per cent from 4.6 per cent a year earlier, surpassing the national average of 7.1 per cent for the first time in nearly two decades.

Loss rates from credit cards, while still low, are rising as are mortgage delinquency rates in the hardest hit provinces, analysts noted.

As well, Moody’s has put several North American energy companies under review for possible credit downgrades.

“While we admit that the full impact of the energy decline will take time to be felt by the Canadian economy and even longer to fully impact the banks' credit quality, it is hard to ignore the fact that the outlook for 2016 is shaping up to be even more difficult than 2015,” Barclays analyst John Aiken wrote in a Feb. 17 note to clients.

With lower oil and a falling dollar weighing on consumer confidence, and the lingering impact of Bank of Canada rate cuts on the banks' interest margins, Aiken said he expects the banks will be challenged to eke out any increase in profitability.

Barclays has reduced its price target for Canadian bank stocks by almost 20 per cent on average.

RBC analyst Darko Mihelic had a more positive take on the banks’ performance in a Feb. 5 forecast, saying he expects the group to report an average 5 per cent earnings growth in the first quarter, with more pain showing up later in the year.

Mihelic raised his earnings forecast for the Bank of Nova Scotia, CIBC and National Bank, saying the evidence the banks will report higher loan losses provisions at this point is “modest.”

Indeed, he expects some banks – chiefly Bank of Nova Scotia, CIBC and TD – to announce quarterly dividend increases this week.

Bank of Montreal kicks off the earning season Tuesday, following by Royal Bank of Canada on Wednesday. CIBC and TD report on Thursday. Bank of Nova Scotia rounds out the season on March 1.

Toronto Star

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