By John Tilak and Euan Rocha
TORONTO, Feb 25 (Reuters) - Faced with a double whammy of
the oil price collapse and a sluggish economy putting pressure
on their corporate and consumer loan books, Canada's major banks
started to show cracks this week as they posted another round of
quarterly profits.
After reporting quarter after quarter of market-topping
results in recent years, the lenders were feeling the pull of
gravity.
Royal Bank of Canada RY.TO , Canada's biggest lender, did
not meet profit estimates on Wednesday for the first time since
early 2013, and No. 2 player Toronto Dominion Bank TD.TO
reported a slim profit miss on Thursday.
Bank of Montreal BMO.TO and Canadian Imperial Bank of
Commerce CM.TO both topped analyst expectations, but also
revealed that bad energy loans were on the rise.
The tone of bank executives on conference calls reflected
the gloomier outlook as well.
"We're starting to see the spillover impact from the energy
patch onto the consumer loan books," Barclays (L:BARC) analyst John Aiken
said. "You're going to see increasing provisions against their
energy portfolio through 2016, and that should likely coincide
with rising consumer charge-offs by the middle of the year."
AGGRESSIVE RESPONSE
Indeed, some banks have become more aggressive in responding
to the energy crisis. RBC set aside a significantly higher
amount to cover for bad loans in the first quarter.
RBC Chief Risk Officer Mark Hughes, in a conference call,
said debt covenant reviews this spring will likely result in
reduced credit for some energy clients.
CIBC Chief Risk Officer Laura Dottori-Attanasio warned
investors the lender's loan losses could double if Canada went
into recession.
The banks were also paying more attention to energy sector
clients.
"We are doing one-on-one analysis on almost all of our
exploration and production clients," RBC Chief Financial Officer
Janice Fukakusa said in an interview.
Though the direct impact on the banks through their energy
clients was immediate, investors were more concerned about the
knock-on effects of an oil-induced economic slowdown, especially
in Western Canada.
The results confirmed that the energy sector fallout is
finally being felt in the banks' consumer portfolios, though
some banks expected to make it up elsewhere.
"While we are experiencing deterioration in the consumer
credit portfolio in the oil-impacted provinces, it is largely
offset by strong performance across the rest of the country," TD
CFO Riaz Ahmed said in an interview.
NO APOCALYPSE
Analysts have also been weighing various scenarios to assess
the risks, but few see a doomsday scenario playing out.
"Under a moderate stress scenario...it will be a
profitability concern, not a capital concern," Moody's analyst
David Beattie said. "If it is a severe stress case scenario, it
may require capital conservation measures on the part of the
banks."
Some portfolio managers saw safety in the banks despite the
economy, as their investment options beyond resources remained
limited in Canada.
"So far there's nothing apocalyptic that's happening," said
Michael Formuziewich, portfolio manager with Leon Frazer, which
owns positions in RBC, TD, Scotia and BMO. "The pain will grow,
but in my opinion it is not going to lead to even a single year
where the banks lose money. It's just not going to get to those
levels."
Some investors even see opportunities in the historically
low multiples the stocks were trading at.
"The valuations are the cheapest they've been since the
financial crisis," said Barry Schwartz, portfolio manager at
Baskin Financial Services. "If oil has bottomed here, this is a
gift from the gods. This is the time you should be selling your
house to buy Canadian banks."
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Loan loss provisions rise at Canadian banks [http://tmsnrt.rs/1QAvhjO
]
Canadian banks' share prices dented by oil price rout [http://tmsnrt.rs/1KNW6VS
]
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