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Bank watch lists early warning sign of trouble for oil and gas industry

March 6, 2016

Bank watch lists early warning sign of trouble for oil and gas industry

Royal Bank, CIBC and Scotiabank each added 9 oil and gas firms to watch lists in recent quarterly earnings

In releasing their latest quarterly earnings, Royal Bank, CIBC and Scotiabank each added nine oil and gas firms to their loan watch lists, the latest sign of trouble in the oilpatch.

In releasing their latest quarterly earnings, Royal Bank, CIBC and Scotiabank each added nine oil and gas firms to their loan watch lists, the latest sign of trouble in the oilpatch. (Larry MacDougal/Canadian Press)

They are the early warning signs that a company may struggle to repay its debts: watch lists.

In releasing their latest quarterly earnings, Royal Bank, CIBC and Scotiabank each added nine oil and gas firms to their loan watch lists, the latest sign of trouble in the oilpatch. The names of those companies are kept confidential.

Gordon Sick, a finance professor at the Haskayne School of Business at the University of Calgary, said many energy companies are struggling and likely behind in their loans.

“There’s a lot of them who are potentially in default,” said Sick. “The banks in Canada are potentially looking at some hits.”

Royal Bank’s watch list grew after it did a name-by-name stress test on its oil and gas portfolio, said chief risk officer Mark Hughes.

“Following this stress test, we’ve seen a small increase to our oil & gas watch list for closer monitoring,” Hughes said in an email.

One step before ‘impaired’

The watch list has the banks keeping a close eye on the companies, and is one step before impaired status when a bank considers the loan at risk of default.

Scotiabank said five per cent of its energy portfolio was on the watch list and it moved four loans to impaired status in the first quarter. CIBC said it impaired one loan.

…click on the above link to read the rest of the article…

Peak Debt, Peak Doubt, & Peak Double-Down

October 20, 2015

Peak Debt, Peak Doubt, & Peak Double-Down

Time to Hike Rates
It makes little sense to me why the market is only pricing a 6% probability of a rate hike at the October meeting, 30% for December, and only a near 50/50 probability all the way out to March 2016.  The statutory mandates of the Fed as stated in the Federal Reserve Act are “maximum employment, stable prices, and moderate long-term interest rates”.  All three have been fully realized.

The unemployment rate is 5.1% (full-employment).  Core CPI has been stable for years and printed 1.9% yesterday; remarkably close to the Fed’s self-imposed target of 2%.  For a few years, Treasury rates have been stable at near-historical low levels. In addition, the 4-week moving average of Unemployment Claims fell to its lowest level since 1973.  The most recent employment report was a bit weaker than expected, but it fell within a standard margin of error.  Yet, the Fed continues to remain at the emergency rate of 0.0%.

At the September meeting, the FOMC talked up the economy, but refrained again from hiking rates, citing “international developments”. By making this decision, the Fed has to be careful it does not also provide an ‘emerging markets put’.

As the October meeting approaches, international developments have settled down.  Emerging market stocks indexes and currencies have bounced since the September FOMC meeting. Chinese markets in particular have calmed down and have traded higher. The US stock market is higher. The trade-weighted dollar is lower. Credit spreads are tighter. The arguments for a hike at the October or December meeting should have increased not decreased.

The recalibration in rate hike probabilities could be the result of the “data dependent” language which has never been adequately defined.  It is suspect to believe that monetary policy for an $18 trillion complex global economy is being determined by a backward looking piece of monthly economic data.

…click on the above link to read the rest of the article…

Scotiabank Warns “The Fed Is Cornered And There Are Visible Market Stresses Everywhere”

August 5, 2015

Scotiabank Warns “The Fed Is Cornered And There Are Visible Market Stresses Everywhere”

Part One, China

An economic slowdown is underway in China.  This is reflected in the steep drop in the commodity complex and in the currencies of emerging market countries. Large imbalances are being worked off as Beijing attempts to shift the composition of its growth.  Policy decision are not always economic.

New sources of growth are being sought by Beijing as deleveraging occurs.  Since officials care foremost about social stability, they try to preserve as many current jobs as possible during their attempt at economic transformation.  During this period, banks might be averse to calling in loans.  State owned enterprises (SOEs) are pressured to keep producing, so that workers can continue to receive a pay check.  The result is over-production and downward pressure on prices.

Part Two, The Seven Year Fed Subsidy

The Fed’s zero interest rate policy has provided a subsidy to investors for the past 7 years.  The lure of easy profits from cheap money was wildly attractive and readily accepted by investors. The Fed “put” gave investors great confidence that they could outperform their exceptionally low cost of capital.  These implicit promises by central banks encouraged trillions of dollars into ‘carry trades’ and various forms of market speculation.

Complacent investors maintain these trades, despite the Fed’s warning of a looming reduction in the subsidy, and despite a balance sheet expected to shrink in 2016.  It has been a risk-chasing ‘game of chicken’ that is coming to an end.  Changing conditions have skewed risk/reward to the downside.  This is particularly true because financial assets prices are exceptionally expensive.

Maybe investors do not believe ‘lift-off’ looms, because the Fed has changed its guidance so many times.  Or maybe, investors are interpreting plummeting commodity prices and the steep fall in global trade as warning signs that global growth and inflation are under pressure.  

…click on the above link to read the rest of the article…

 

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