Canadian banks stand to lose from oil slump

By Andrew Rickard | February 25 2016 09:45AM

Moody's says that falling oil prices could reduce the profits of Canada's largest banks.

In a report released on Feb. 22, the credit ratings agency warned that falling energy prices could hurt Canadian banks. In the event of a severe stress scenario, it suggests that some banks might be forced to take capital conservation measures, cut dividends, or raise additional equity.

Financial stress tests

Moody's conducted financial stress tests on the biggest Canadian banks, including Toronto-Dominion Bank (TD), Bank of Nova Scotia (BNS), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and National Bank of Canada.

CIBC and BNS were negative outliers in the stress testing results. Moody's notes that CIBC has "a considerable oil and gas concentration in its corporate loan book as well as high reliance on earnings coming from capital markets activities", while BNS's poor stress test results were due to its oil and gas loan book (relative to CET1) as well as its corporate loans which are skewed toward oilfield services. TD, on the other hand, was a positive outlier in the tests; Moody's says the bank has a relatively small oil and gas corporate loan book, as well as a comparatively low concentration of retail operations in oil-producing provinces and low reliance on capital markets earnings.

Corporate and consumer portfolio losses

"The deterioration in oil prices will increase financial stress on Canada's oil producers, drillers and service companies that support them, as well as on consumers in the country's oil-producing provinces," says Moody's senior vice president David Beattie. "Correspondingly, banks' losses in their oil-related corporate and consumer portfolios are expected to increase, and their capital markets income are expected to decline."