These Are The Two Canadian Banks Most Exposed To A Severe Oil Shock According To Moody’s
Two weeks ago we asked if, in the aftermath of the dramatic selloff suffered by European banks over commodity exposure concerns, whether Canadian banks would not be next in line. The reason was that according to an RBC report, while US banks had already taken significant reserves against future oil and gas loans, roughly amounting to 7% of their exposure, Canadian banks were stuck in denial.
As RBC grudgingly noted, “The small negative moves in credit would normally not even “register” were it not for plenty of evidence of issues surround the oil and gas sector and the impact it could have on the oil producing provinces in Canada.” Yes, well, China already advised its media to stick to “positive reporting” – sadly for the energy-rich or rather energy-por province of Alberta it is now too late.
As for ths reason for this surprising reserve complacency, RBC said the following:
Canadian banks like to wait for impairment events to book PCLs rather than build reserves (called sectoral reserves in the past) for problematic industries.
In other words, let’s just wait with the reserves until the losses are already on the book: hardly the most prudent approach which may be why today, with its usual several week delay, Moodys opined on which Canadian banks it views as most susceptible to a “severe oil slump.”
As quoted by to Bloomberg, Moody’s said that “Canadian Imperial Bank of Commerce and Bank of Nova Scotia would be nation’s hardest hit lenders if the oil slump became sharply worse, while Toronto-Dominion Bank would best be able weather a worsening rout.”
“The prolonged slump in oil prices will increase the financial stress on oil producers and the drillers and service companies that support them, as well as on consumers in oil-producing provinces,” Moody’s said.
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