TORONTO, June 1 (Reuters) - Canadian banks’ exposure to the beleaguered energy industry contributed to plunging profits in the second quarter, but investors said that as oil prices recover, the tenfold boost in loan-loss provisions lenders made from a year earlier may be enough to absorb any losses.
Even as impairments in banks’ energy loan portfolios soared, outpacing growth in soured commercial loans overall, Canada’s biggest banks increased lending to the oil and gas sector at a faster pace than to other industries.
Meanwhile, money set aside to cover energy loan losses rose to C$450 million ($330.37 million) at Canada’s four biggest banks, from C$46 million a year earlier, according to Reuters calculations. That compared with a tripling in provisions for total commercial loans.
Energy loans are the riskiest part of banks’ portfolios, but “there have been a lot of provisions taken... and I think it’s probably going to be enough,” said Brian Madden, portfolio manager at Goodreid Investment Counsel. “The wild card, of course, though, is if (oil prices) go back to zero.”
U.S. crude futures have bounced back from an April trough of minus $40.32 to $35.90 on Monday.
The oil price recovery “is as V-shaped as you’re going to get... I have to believe that the past quarter was probably the worst we’re going to see,” said Allan Small, senior investment adviser at Allan Small Financial Group with HollisWealth.
Not all market watchers share that sentiment. Edward Jones analyst James Shanahan pointed out that soured energy loans are currently at half the level seen during the 2016 oil price collapse, relative to total energy lending, and could get back to that rate.
Despite the recovery in energy prices, they are not much higher than the $26.05 trough seen in 2016.
Reporting By Nichola Saminather in Toronto; Additional reporting by Noor Zainab Hussein in Bangalore; Editing by David Gregorio