* Canadian banks and low oil prices: Two articles


Cracks may begin to appear in Canadian bank earnings as oil downturn persists

Yadullah Hussain and Barbara Shecter 

Canadian banks could see their forecast earnings decline if the oil downturn spills over into the wider economy.

Oil and gas companies defaulting on their loans could shave off as much as 4.3 per cent of estimated earnings at major Canadian banks next year, according to a stress-test report by the Canadian Imperial Bank of Commerce.

Combined with possible contagion effect on non-oil Western Canadian companies and defaults in Alberta’s housing market and retail loans, banks could rack up earnings declines of as much as 8.6 per cent in 2016, CIBC estimated.

“We conclude that while the oil price does not strongly affect default rates in the energy sector in any given year, a prolonged significant drop in the price of oil, combined with weaker economic activity, will be a driver of higher default rates,” CIBC analyst Robert Sedran wrote in a report this week.

Canadian oil is the cheapest in the world, with Western Canadian Select prices settling at US$19.80 per barrel on Wednesday, a US$23 discount over West Texas Intermediate.

Together, Canada’s biggest six banks carry just over a $100 billion of gross credit exposure to the oil and gas sector, and some defaults may ensue as the energy sector reels from a prolonged decline in prices, CIBC said.

The wider economy also remains lacklustre with manufacturing failing to fire up despite a deflated loonie.

“We were bouncing along fine, but it doesn’t leave you an awful lot of room to absorb a shock such as this one, so it does concern you,” Sedran said in an interview Wednesday.

Even as they shored up their balance sheets with equity financing deals, a number of companies in the oilpatch approached their lenders after the first rate cut by Bank of Canada to renegotiate the terms of their loans and effectively blend and extend their borrowings, said John Aiken, director of global research at Barclays Capital.

Laura Pedersen/National Post
Laura Pedersen/National Post
Even as oil doldrums continue and threaten the bottom lines of the country's banks, analysts say the large financial institutions are usually willing to work with borrowers who experience trouble paying their loans.

“Anything that may have been coming due in the near term was renegotiated and pushed out,” Aiken said.

Bank of Nova Scotia is the most vulnerable to the oil and gas sector, with 10 per cent of its business and government loans exposed to the industry, according to CIBC’s analysis. In one scenario, Scotiabank could stand to lose as much 5.4 per cent of its forecast 2016 earnings, CIBC’s test shows. Toronto-Dominion Bank, which is least exposed to the oilpatch as a percentage of its portfolio, would  see only a two per cent decline in earnings.

While CIBC has slightly lower direct exposure to the sector, CIBC’s analysis suggest the bank would see the biggest earnings decline of 5.8 per cent in the most dire of three stress-test scenarios.

Even as oil doldrums continue and threaten the bottom lines of the country’s banks, analysts say the large financial institutions are usually willing to work with borrowers who experience trouble paying their loans. They view calling a loan or seizing assets as a last resort.

“Banks effectively go into business with their clients, businesses or households, when they lend to them. Therefore, it is in a bank’s interest for its clients to remain going concerns,” says Peter Routledge, an analyst at National Bank Financial.

The major Canadian banks’ direct exposure to the sector stood at about $42.7 billion at the end of the second quarter, higher than in the fourth quarter. But drawn and undrawn credit facilities push the figure to $101 billion, with Bank of Nova Scotia holding just under $30 billion in gross credit exposure in its energy portfolio.

From a credit perspective, the third quarter for the banks, which ended on July 31, is still going to be reasonably benign, said Barclay’s Aiken. “We are likely to see cracks form in the fourth quarter and start to see material increases in provisions for credit loses in the early parts of 2016.”

Some Canadian banks are also exposed to the U.S. oilpatch, which has already seen some credit impairment.

The major financial institutions could also stumble as the oil downturn leaks into the wider Canadian economy.

“I am not terribly fussed about the direct exposure… but when something is happening in your broader operating environment, it is difficult to remove yourself,” Sedran said. “When it becomes Canada risk, Canadian banks have it.”

Companies in Western Canada outside the oil and gas sector could also pose challenges for the Big Six banks that include Bank of Montreal, the Royal Bank of Canada and National Bank of Canada. A moderate decline in the credit situation of non-oil Western companies could see banks lose as much as 2.4 per cent in earnings, according to CIBC.

In addition, credit card and non-real estate retail loan exposure — which tend to carry a higher loss ratio even during good times — could see bank earnings decline by as much as three per cent.

The major banks also have $81 billion of uninsured mortgages and home equity lines of credit in oil-producing Alberta, with Royal accounting for about 40 per cent of the figure. However, the CIBC report argues that even a 20 per cent decline in housing prices in the province would be unlikely to create material loan losses.

[End of this article, original at http://business.financialpost.com/news/energy/cracks-may-begin-to-appear.... See also this related story on the price of oil:]

Oil sands brace for more misery as Canadian heavy crude plunges to lowest price in decade

Nia Williams


This latest oil price plunge is piling fresh misery on Canadian oil companies that are close to producing at a loss.


This latest oil price plunge is piling fresh misery on Canadian oil companies that are close to producing at a loss.

CALGARY — Heavy Canadian crude slumped to its lowest level in at least a decade on Wednesday after Enbridge Inc closed two of its main pipelines in the United States because of a leak, piling fresh misery on Canadian oil companies that are close to producing at a loss.

Western Canada Select heavy blend crude for September delivery last traded at $20.75 per barrel below the West Texas Intermediate benchmark, according to Shorcan Energy brokers, having settled at $19.80 per barrel below on Tuesday.

Earlier in the session it hit $21.75 per barrel below WTI, the widest differential since August last year.

That pushed the outright price of Canadian heavy crude to around $22.50 a barrel, a level at which some companies will struggle to cover the cost of production, blending and transportation.

It was lower than the 2008 trough of $24.62, according to one trading source, when U.S. benchmark crude plunged to $32 a barrel as a result of the global financial crisis.

Enbridge shut down its Flanagan South and Spearhead pipelines in the U.S. Midwest late on Tuesday.

The company said it expects to restart the 600,000 barrel per day Flanagan South line later on Wednesday or on Thursday, but it did not know how long the adjacent Spearhead line would remain shut.

The pipelines, which have a combined capacity of nearly 800,000 bpd, carry crude to the U.S. oil futures hub of Cushing, Oklahoma, and are two of the main conduits linking Alberta’s oil sands to refineries on the U.S. Gulf Coast.

The shutdown means crude could get bottlenecked in Alberta, putting further pressure on heavy prices which were already being offered lower after BP Plc’s Whiting, Indiana, refinery suffered damage over the weekend that could take one to two months to repair.

Whiting is one of the biggest consumers of heavy Canadian crude and the reduced demand comes at a time when oil sands production, in particular from Imperial Oil’s Kearl oil sands project in northern Alberta, is ramping up rapidly.

“This will further weigh on Canadian differentials following the unplanned BP Whiting outage and heavy PADD 2 maintenance starting in September,” said Dominic Haywood, an analyst with Energy Aspects.

Traders in Calgary described the latest price drop as “horrible”, and said many were anticipating mid-month apportionment rationing the volume of crude each shipper can put on Enbridge lines.

Flanagan South and Spearhead also transport light and sweet crude and traders said they expected an impact on those grades too.

Light synthetic crude from the oil sands for September delivery last traded at $5.15 a barrel below WTI. It settled at $4.30 per barrel below the benchmark on Tuesday.

[End of article; original at link below]