* Provisions expected to increase in second quarter
* Expected losses to reflect recent redeterminations
* Two banks have hiked provisions ahead of results
By Matt Scuffham
TORONTO, May 20 (Reuters) - Canada's biggest banks are
expected to set aside more funds to cover bad loans to the oil
and gas sector, eating into their profits when they announce
second quarter results next week, analysts say.
Royal Bank of Canada RY.TO , Bank of Nova Scotia BNS.TO ,
Bank of Montreal BMO.TO and Canadian Imperial Bank of Commerce
CM.TO all reported an increase in losses from oil sector loans
that turned sour in the first quarter.
Although oil prices have improved since February, the banks'
second-quarter results will show the impact of credit lines to
oil firms being tightened to reflect lower oil prices, a move
that could lead some to default on their loans, analysts say.
The situation is likely to have been exacerbated by the
impact of the Alberta wildfires, which has led to several
producers being unable to fulfill supply contracts.
"We believe that provisions are going to increase in the
second quarter for the Canadian banks. I think it's likely going
to reflect the redeterminations that just took place," said
Fitch Senior Director Doriana Gamboa.
Energy companies across Canada and the United States have
met with their banks in recent weeks to determine how much debt
they can continue to hold as part of a bi-annual process and
senior bankers have told Reuters credit lines have been cut by
around 15-20 percent.
Two mid-sized Canadian banks already have increased
provisions ahead of announcing their results.
National Bank of Canada NA.TO estimated it would set aside
C$250 million in the quarter ended April to cover bad loans to
the oil and gas industry, much higher than the C$17 million it
set aside in the first quarter. Alberta-based Canadian Western
Bank CWB.TO said it had set aside another C$33 million.
Barclays (LON:BARC) analyst John Aiken said those warnings had
"re-ignited" energy credit concerns for Canadian banks.
Scotiabank has the highest exposure to the oil and gas
sector of any major Canadian bank, equivalent to 3.6 percent of
its total loan book, followed by Royal Bank of Canada RY.TO .
In addition to direct losses from bad loans to oil and gas
firms, banks also face a secondary impact from the knock-on
effect on consumers affected by the oil slump. Defaults on
consumer loans in oil-producing regions such as Alberta, which
has been hit by rising unemployment, have already hiked, and
analysts say the situation could deteriorate further.