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These Are The Two Canadian Banks Most Exposed To A Severe Oil Shock According To Moody’s
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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Canadian dollar dips below 77 cents with more pain to come
TD Bank predicts 73-cent loonie as effects of low oil linger
The Canadian dollar is nearing its low for the year Friday, after news that the economy contracted for a fifth straight month in May.
The loonie closed at 76.45 US cents, down half a cent from Thursday, after Statistics Canada said the economy shrank 0.2 per cent in May. The lowest close this year is 76.40 US cents.
- Where to travel with the falling Canadian dollar
- Plunging loonie means inflation in store: Don Pittis
TD Bank economist Leslie Preston says the dollar is likely to go to 73 cents this year, and will stay in the mid-70s for at least another year.
“Lower oil prices and more stimulative monetary policy also led us to downgrade our forecast for the loonie. We now expect the Canadian dollar to depreciate versus the U.S. dollar, reaching 73 cents by the second quarter of next year, before rising gradually back up to 76 cents by the end of 2016,” she said in a report to investors.
Canada’s economic performance is a sharp contrast from the U.S. economy, which grew 2.3 per cent in the second quarter of the year according to the latest assessment from the Commerce Department.
Low oil prices, which have stayed below $50 per barrel for the past month, are hurting capital investment by the oil sector and have resulted in elimination of hundreds of jobs.
The low loonie was supposed to help Canada boost exports and stimulate the manufacturing sector, especially with the U.S. in growth mode.
But despite a Bank of Canada rate cut earlier this month, the business outlook is still lacklustre.
…click on the above link to read the rest of the article…
