March 10, 2020 / 3:29 PM / 20 days ago

UPDATE 2-Canadian banks face higher loan losses, lower earnings after energy lending growth

(Adds analyst comment, updates shares, oil price)

By Nichola Saminather

TORONTO, March 10 (Reuters) - Canadian banks boosted oil and gas lending at about double the rate of total business loan growth over the past three quarters, raising the specter of higher loan losses after Monday's oil price crash.

Energy lending has picked up at Canada's top banks even as bad loans and provisions for losses from the sector climbed, an analysis of company data by Edward Jones and Reuters shows.

Oil prices rebounded nearly 8% on Tuesday, following Monday's slide of more than 20% on fears of a price war after Saudi Arabia and Russia said over the weekend they would raise oil production. Technical analysts said prices may be consolidating in a lower range.

"The developments (over the) weekend ... are certainly negative for any banks that made loans to borrowers in oil and gas," said James Shanahan, an analyst at Edward Jones. "I definitely see an increase in loan losses."

Banks' energy-related credit-loss provisions have climbed to the highest levels since 2016, while bad loans hit the highest in over two years in late 2019. The Canadian bank sub-index rose 0.9% by Tuesday afternoon, after Monday's 11.2% decline.

Impairments at 2015-16 levels would hit banks' earnings per share by 2% to 6%, depending on the severity of losses, Gabriel Dechaine, National Bank Financial analyst wrote in a note.

Bank of Montreal, TD Bank and Royal Bank of Canada have led growth in oil and gas lending over the past three quarters.

Oil and gas loan impairments across Canada's banks were about 1.7% in the first quarter compared with 0.69% across all business loans, according to data from Scotiabank analyst Sumit Malhotra.

While that is down from a 6% peak in 2016, "another reset lower on prices just puts pressure on the banks," Malhotra said.

Banks were already bracing for margin pressures after Canadian and U.S. central banks last week cut interest rates by 50 basis points in response to the coronavirus outbreak.

Canadian banks' energy loans grew 16% in the quarter ended Jan. 31 from a year earlier, compared with 9% in total business and government lending. That followed 25% and 26% growth in the prior two quarters, versus 11% and 13% overall.

Lending activity rose following a "prolonged period" of very low write-offs on oil and gas loans, Edward Jones' Shanahan said.

That pared some of the banks' longer-term pullback from energy lending, with the loans accounting for about 5% of commercial loans, down from 6.3% five years ago, but up from 4.5% in 2018.

A BMO spokeswoman directed Reuters to Chief Risk Officer Patrick Cronin's comments in January that overall lending-book credit quality remained sound. BMO, whose proportion of energy loans remains in line with the industry average, attributed some of the growth to the acquisition of $3 billion of loans from Deutsche Bank in 2018.

Bank of Nova Scotia and Canadian Imperial Bank of Commerce had the biggest proportion of oil and gas loans relative to total commercial loans, at 7.1% and 6.6% respectively. Still, Scotiabank's energy loans account for 2.7% of total lending, down from 3.6% in 2016, and most of them are investment grade, a spokeswoman said.

An RBC spokesman said the bank's energy loans accounted for only 1.3% of total lending.

"A stable economy requires stable energy prices," RBC CEO Dave McKay said at a conference on Tuesday.

"To stop doing certain things we do today undermines the stability of energy, the stability of our economy. And it undermines our ability to make this critical transition."

TD, CIBC and National Bank of Canada spokespeople declined comment.

Mark Naron, director at Fitch Ratings, expects higher energy-related provisions and impairments. "I don't think it's easy for Canadian banks to fully step away." (Reporting by Nichola Saminather; Editing by Tom Brown, Dan Grebler and David Gregorio)

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