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Rankings & dataMarch 11 2016

Canadian banks hit by low oil and gas prices

Large Canadian banks are facing a rise in impaired loans – with the exception of TD Bank – because of the oil and gas slump, with Scotiabank having the largest exposure to the sector and the Bank of Montreal the smallest, writes Matthew Karwacki. 
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Canadian banks are profitable operations, but how much will falling energy prices hurt them? The Banker collected the direct oil and gas exposure for Canada’s largest five banks – Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD Bank), Scotiabank, Bank of Montreal and Canadian Imperial Bank of Commerce (CIBC).

Scotiabank emerges as having the largest corporate exposure. The bank holds C$17.9bn ($13.4bn) in drawn and C$14.1bn in undrawn commitments to oil and gas firms (see chart one). Drawn commitments are known while undrawn commitments are an estimate of the contractual amount that may be drawn by the debtor. Scotiabank is the most internationally active of the 'big five', mostly in emerging markets that are also suffering from the commodity rout. In the first quarter of 2016, Scotiabank had a joint C$68.63bn exposure to Asia, Latin and Central America; however, the bank actually saw a 5% profit gain on the back of the higher international business earnings in the first quarter of 2016.

Chart 1

According to the bank, approximately 58% of gas and oil loan exposures were investment grade at the end of October 2015. However, the impaired loans to oil and gas companies grew by C$171m in the first quarter of 2016, to C$336m. This upward trend in non-performing energy loans is the case for most banks in the group (see chart two).

RBC, which is the largest bank in the country, ranks second by energy sector exposure. The lender has C$8.38bn in drawn and C$13.7bn in undrawn exposures, in addition to C$1.55bn in other off-balance sheet exposures and C$795m in derivative exposures. Unlike Scotiabank, RBC is primarily exposed to the US and Caribbean. Although impaired energy loans nearly doubled in the first quarter of 2016, to C$310m, that did not prevent the bank from earning the highest net income in the group, C$2.45bn.

TD bucks the trend

CIBC and TD Bank have similar levels of total exposure, C$18.65bn and C$18.89bn, respectively. However, TD Bank appears to be better situated than CIBC, which is the smallest bank of the five. TD Bank earned the second largest net income in the country: C$2.25bn in the first quarter of 2016, as its balance sheet is supported by a large retail unit in the US that contributed 33.42% of the bank’s revenue. Moreover, unlike any other big Canadian banks, TD Bank saw the amount of impaired energy loans drop in the final quarter of 2015, by C$13m to C$86m.  

The same can be said of the Bank of Montreal which has the smallest exposure of the group: C$7.18bn in drawn and C$8.24bn in undrawn commitments. As is the case with TD Bank, it has a lucrative US retail arm, although it also has prominent capital markets and wealth management divisions.

Chart 2 2

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