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Economy will weather the oil rout, banks CEOs say

‘The contagion back to the rest of the economy is nominal right now,’ Dave McKay, Royal Bank of Canada’s CEO, said at a conference on Jan. 12, 2016, that brings together the leaders of all of Canada’s big banks.

Gloria Nieto/The Globe and Mail

Bank chief executives believe that the broader Canadian economy will remain relatively insulated from the depressed energy sector, even as the price of oil explores 12-year lows.

"Sometimes there is a disconnect between the economy and what's going on in the market, and this is one of those times," Brian Porter, chief executive officer of Bank of Nova Scotia, said during a conference in Toronto that brought together the leaders of all of Canada's major banks.

Oil has fallen more than 30 per cent over the past 12 months, sending the Canadian dollar down sharply next to the U.S. dollar and raising concerns about the health of Canada's economy.

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However, Royal Bank of Canada's CEO Dave McKay said the level of contagion from the energy sector to the rest of the country has been nominal, as Canadians increasingly spend money closer to home and exporters in Central Canada find new markets for their products, providing important offsets.

"You're starting to see that lag effect of a weaker dollar, which often takes somewhere between 12 and 24 months to really kick in," Mr. McKay said.

The upbeat comments suggest that lenders are at odds with increasingly nervous investors who have driven down commodity prices, major stock markets and economic forecasts this year.

Crude oil on Tuesday fell close to $30 (U.S.) a barrel, moving toward some of the worst-case scenarios used by banks in their stress tests. The latest dip sent the Canadian dollar briefly below 70 cents for the first time since 2003.

Bank executives have been saying for more than a year that losses associated with loans made to the energy sector will rise, but should stay within relatively acceptable levels of about 0.4 per cent.

Victor Dodig, CEO of Canadian Imperial Bank of Commerce, reiterated that just 2 per cent of the bank's loans are exposed to the energy sector, 78 per cent are investment grade and energy executives are adjusting to the new environment by cutting costs.

"Clients are being smart. They've been through this before," he said.

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Some executives sounded very different in their views on energy prices, though. RBC's Mr. McKay said the price of oil could rebound toward $50 a barrel this year, depending on factors such as U.S. production and instability in the Middle East.

However, Bank of Montreal's Bill Downe said his bank would be preparing for a far gloomier scenario. He said BMO will use a new worst-case situation for the bank's stress tests, factoring in oil at just $25 a barrel.

Yet, like his peers, Mr. Downe believes low energy prices will help other areas of the economy, for example, by reducing heating costs for consumers.

"The benefits to the rest of the economy are being underestimated," Mr. Downe said, adding that Ontario and Quebec should see economic growth of 2 per cent or more.

National Bank of Canada's CEO Louis Vachon reminded his audience that a year ago, when bank executives were subjected to similar questions about the impact of falling oil prices, he expected the economy in Central Canada would benefit.

"That's exactly what happened in 2015," he said, noting that 82 per cent of Canadian employment growth occurred in Ontario and Quebec, and that the good news should persist into 2016.

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Indeed, CIBC's Mr. Dodig believes the Canadian economy won't even require additional interest rate cuts by the Bank of Canada.

"I think that the Canadian dollar has and will provide the necessary stimulus," he said.

Bharat Masrani, CEO of Toronto-Dominion Bank, was more cautious, though: "You see some good news coming out of this, but let's see how that plays out," he said.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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