March 10, 2020 / 10:03 AM / 3 months ago

Canada banks face higher loan losses after recent growth in energy lending

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

The pick-up in energy lending at Canada's six top banks has come even as bad loans and provisions for losses from the sector climbed, an analysis of company data by Edward Jones and Reuters shows.

"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 this year, while loan losses hit the highest in over two years in late 2019. On Monday, the Canadian bank sub-index fell 11.2%.

Oil prices had their biggest one-day rout since the 1991 Gulf War on Monday after Saudi Arabia and Russia signaled they would hike output.

Bank of Montreal's lending to the energy sector led the growth in the year to Jan. 31 with a 42% increase; TD Bank's grew 31% and Royal Bank of Canada's 17%.

Oil and gas loan losses across Canada's banks stood at 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 are already bracing for margin pressures after Canadian and U.S. central banks last week cut interest rates 50 basis points in response to the coronavirus outbreak.

Canadian banks' energy loans grew 16% in the quarter ended Jan. 31, 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, Shanahan said.

That pared some of the banks' longer-term pullback from energy lending, with the loans accounting for about 5% of commercial loans, 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 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, from 3.6% in 2016, and most of them are investment grade, a spokeswoman said.

A Royal Bank spokesman said the bank's energy loans accounted for only 1.3% of total lending.

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

"Energy still plays an important role in Canada," said Mark Naron, director at Fitch Ratings, who 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)

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