TORONTO – Canadian banks are taking a closer look at their loan books in light of continued declines in the price of crude, with one bank stress-testing its oil and gas sector portfolio to see how it would perform if the commodity dips as low as US$25 a barrel.
“You’ve got to ask yourself, how low could it go?” Bank of Montreal’s chief executive Bill Downe said as he laid out the bank’s stress test scenarios during a conference of bank CEOs in Toronto on Tuesday.
Banks use stress tests, which are computer-generated simulations, to gauge how certain hypothetical economic events might impact their businesses.
Although it is studying the worst-case scenario of $25 a barrel oil, overall, BMO’s stress tests assume an average price of $35 a barrel over the course of the year.
“I recognize that today the price of WTI is below that, but I think that’s a reasonable price and assumption,” said Downe, as crude oil futures were trading close to US$30 a barrel.
For 2017 the bank (TSX:BMO) is using $30 a barrel oil for its stress tests, and for 2018 it’s considering the potential effects of a $40 a barrel scenario.
Meanwhile, Royal Bank (TSX:RY) CEO Dave McKay said he expects oil to start moving back towards the $50 a barrel range — and maybe slightly above — over the next 18 months.
“It’s a little softer than anybody predicted right now,” McKay said.
CIBC (TSX:CM) chief executive Victor Dodig said the bank’s stress testing has shown that if the price of oil remains at $30 for three years, the bank will see cumulative loan losses of $650 million.
About 75 per cent of those losses would be in the bank’s business loan books, while one quarter would be in personal loans, Dodig said.
However, Dodig noted that the stress tests don’t take into account the positive impacts of the low loonie — something that several of the CEOs highlighted on Tuesday.
RBC’s McKay noted that Canada’s economic woes have so far been contained within oil-producing provinces, particularly Alberta, while other regions are being helped by a decline in the dollar’s value.
“You’re seeing that weaker Canadian dollar drive great strength in B.C.,” he said. “You’re seeing great strength in Toronto.”
The low Canadian dollar is expected to lure more tourists to the country and benefit Canadian exporters by making their products more competitively priced in foreign markets.
CIBC’s Dodig said the low loonie could inject enough fuel into the country’s economy to mitigate the need for another interest rate cut from the Bank of Canada. The central bank reduced its key lending rate twice — each time by a quarter of a percentage point — last year.
“I don’t think we need a rate cut,” Dodig said. “I think the Canadian dollar has and will provide the stimulus necessary.”
But, he added, “That’s not my call, that’s the call of the governor of the Bank of Canada.”
Although a further rate cut would compress the banks’ lending margins, both Dodig and his counterpart at TD Bank (TSX:TD) said they could weather such a move.
“We will adapt to whatever environment we find ourselves in,” TD’s Bharat Masrani said.
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