File photo of the Scotiabank headquarters on King St., in Toronto.Fernando Morales/The Globe and Mail
Energy loan losses will be back in the spotlight this week as Canada's biggest banks wrap up their fiscal third-quarter earnings season.
Bank of Nova Scotia and National Bank of Canada, which report on Tuesday and Wednesday, respectively, have the largest direct exposure to the energy sector.
Among the major lenders, National Bank and Scotiabank set aside some of the biggest provisions for impaired energy loans for the first half of fiscal 2016.
Although third-quarter results from other banks suggest that oil and gas loans are souring at a slower pace, there are lingering concerns about energy prices.
U.S. oil prices have recovered from their lows but remain down about 55 per cent from mid-2014.
"With oil prices and gas prices remaining as low as they are, I don't think the Canadian banks are out of the woods yet," said James Shanahan, a bank analyst with brokerage Edward Jones in St. Louis, Mo.
Some bank executives, though, are decidedly more upbeat.
Scotiabank chief executive officer Brian Porter has already predicted that energy loan losses have reached their limit.
"We expect loan losses from the energy sector to have peaked this quarter," Mr. Porter told analysts on a conference call in May to discuss the bank's second-quarter results.
At the time, some analysts were skeptical. Mr. Porter, however, said the bank's forecast on energy loan losses "reflects the quality of our portfolio and underwriting."
Scotiabank, Canada's third-largest bank by assets, had about $16.3-billion in drawn energy loans at the end of the second quarter.
Its provisions earmarked for energy loan losses totalled $277-million for the first half of fiscal 2016.
"We see BNS [Scotiabank] as having an overweight exposure to commodities-centric economies (e.g., Canada, Peru, Chile, Colombia) and, given the uncertain and volatile trajectory of the commodities cycle, we have an inclination to remain cautious," Peter Routledge, an analyst with National Bank Financial, wrote in a recent note to clients.
"Notably, several key jurisdictions within its international banking segment are heavily reliant on commodity exports to China (i.e., Peru, Chile), where demand has floundered and economic uncertainty has intensified," he added.
National Bank, the country's sixth-largest bank, had about $2.9-billion in oil and gas loans at the end of its second quarter. Analysts have scrutinized its energy lending portfolio in part because its customer base includes small- and medium-sized energy companies that have been hit hard by the two-year slump in oil prices.
"National Bank has a relatively large commercial oil and gas portfolio compared to the others – one of the largest relative to their capital. But they've already taken some big losses in that portfolio," Mr. Shanahan said.
In May, National Bank created a special reserve to absorb impaired energy loans. Its provisions for energy loan losses totalled $320-million on a cumulative basis as of the end of the second quarter, according to an analysis by Scotia Capital Inc.
Rita Trichur