By John Tilak and Euan Rocha
TORONTO, Feb 22 (Reuters) - Moody's warned on Monday that
the oil price slump will strain profitability at Canada's
largest banks, which begin reporting results this week, however
analysts expect regional banks will feel the brunt of the pain
as the energy-rich province of Alberta reels from the downturn.
The rating agency said under its severe stress scenario some
of the country's big six - Royal Bank of Canada RY.TO , Toronto
Dominion TD.TO , Bank of Nova Scotia BNS.TO , Bank of Montreal
BMO.TO , CIBC CM.TO and National Bank of Canada NA.TO , may
be required to take capital conservation measures, cut dividends
or raise additional equity.
"There's going to be additional pressure on bank earnings in
2016," said Barclays (L:BARC) analyst John Aiken. "The banks and economy
aren't going to be able to sidestep most of the damage."
Analysts expect the diversified portfolios of the big six to
shelter them somewhat, but with oil dipping below $30 this year,
smaller players like Edmonton-based ATB Financial and Canadian
Western Bank CWB.TO are expected to report the biggest
increases in provisions for credit losses given their outsized
exposure in Alberta.
The worry is the oil rout will hit mortgages, auto loans and
credit card debt of consumers, especially in Alberta.
"When Alberta's doing well we have a tailwind and when it is
hurting, we face a headwind for sure," said ATB Chief Executive
Dave Mowat, who sees the bank's loan loss provisions potentially
tripling this year, albeit off a very low base.
Some fear losses could mount as Alberta is one of the only
provinces to offer non-recourse mortgages; loans that are not
compulsorily insured up-front as they have at least 20 percent
cash paid down.
Non-recourse loans allow borrowers to give up their homes
and walk away from their loans, without the lenders being able
to seize their other assets, as lenders can in most other parts
of the country.
DIRECT EXPOSURE
ATB, a crown corporation owned by the province of Alberta,
has overall direct loan book exposure to the energy patch of
around 6 or 7 percent, while the direct exposure of its rival
Canadian Western stands at about 5 percent.
In comparison, the big six Canadian banks have exposure that
ranges from 0.9 percent to 3.5 percent, while energy exposure at
the six biggest U.S. banks ranges from 1.6 percent to 5 percent.
Besides the direct loan exposure to the energy sector, the
two regional banks' larger concentration of their overall
lending books in Alberta is a concern. Alberta's jobless rate
last month hit its highest since 1996.
Chris Fowler, chief executive of Canadian Western Bank , said
lower growth in Alberta would hurt the company's earnings, but
noted the bank does have a bit of a buffer from the job losses
across the province.
"Being a commercially focused bank, we are less impacted by
unemployment," he said, citing the bank's focus on corporate
versus consumer lending.
Still, Canadian Western's shares have nearly halved in value
since peaking in 2014, and with 48 percent of its loan portfolio
centered around Alberta and Saskatchewan, the bank's provisions
for credit losses will move higher, warned Credit Suisse (VX:CSGN) analyst
Kevin Choquette, in a recent note.
(Editing by Tom Brown)