Canadian bank headquarters are pictured in Toronto in this file photo.Brent Lewin/Bloomberg
Canadian bank executives made two predictions after the price of crude oil fell to 12-year lows early this year and energy companies struggled to meet their loan obligations.
The first prediction: The banks have been through commodity downturns before and came through unscathed. This downturn would be no exception.
The second: Whatever loan losses the banks incurred would likely peak in the second quarter.
With the the banks' fiscal third-quarter financial results now in the books, both predictions look bang on. But there's a reason no one has declared an end to the uncertainty over the energy-related fallout: When it comes to predicting oil prices, the banks are as useless as the rest of us.
The price of crude oil dipped below $30 (U.S.) a barrel in January and February, down from more than $100 a barrel in 2014, raising concerns that the banks would be on the hook for billions of dollars worth of loans to energy companies if many of them failed.
Oil recovered to more than $50 a barrel in June – the midpoint of the bank's May-to-July fiscal third quarter – but the rebound has since sputtered. Oil traded near $45 on Friday.
The biggest banks set aside considerably less money in the third quarter to cover bad loans than they did in the previous quarter, easing concerns about their exposure for now.
On average, provisions for credit losses fell by about 10 per cent. Expressed as a ratio of overall loans, these provisions fell below 0.3 per cent (or 30 basis points), in line with the long-term average and down from nearly 0.35 per cent in the second quarter.
The money set aside specifically to handle bad loans to the energy sector fell even more for most banks, quarter over quarter. On average, these provisions fell by more than 60 per cent for the Big Six.
For Canadian Imperial Bank of Commerce, provisions for credit losses to oil and gas companies fell to just $2-million in the third quarter, down from $81-million in the second quarter. Royal Bank of Canada's provisions fell to $30-million from $115-million.
Bank of Nova Scotia, a bigger concern heading into the quarter given that it had relatively more outstanding loans to the energy sector, reported that its provisions declined to $37-million from $150-million.
If the numbers didn't drive home the story of an improving situation, executives did: "Last quarter we indicated that energy-related losses had peaked and that our loss ratio would improve, which was indeed the case this quarter," Brian Porter, Scotiabank's chief executive officer, said in a conference call with analysts.
Others are suggesting that, following a period when banks were reducing loans to energy companies, the cutbacks may be over. CIBC increased its loans to oil and gas companies by more than $500-million in the third quarter.
Although National Bank of Canada cut its outstanding loans to oil and gas companies by nearly $400-million since the second quarter and $900-million year over year, its chief executive officer suggested that the next move could be up.
"We feel we're getting to the bottom of how low we want to get in terms of oil and gas," Louis Vachon said. He expects that "balances in the oil and gas book should start growing again."
Nonetheless, the banks aren't declaring that the threat from energy-related losses is over.
"I guess I still remain cautious," Mark Hughes, chief risk officer at Royal Bank of Canada, said during a conference call. The improvement of oil prices, he added, is merely "helpful."
Asked in an interview whether the worst is over, Riaz Ahmed, chief financial officer at Toronto-Dominion Bank, responded: "Who knows? Some people will give you oil and gas prices as being fundamentally driven and some see them as more politically driven and some of them believe they are driven by events. All three are true, so you can't know exactly where oil and gas prices will be.
"I hope that the worst is behind us," Mr. Ahmed said. "But I can't make the call on that."