By itself the decline of the energy sector shouldn’t hurt the Canadian banks too much, but the spillover effects to other parts of the economy could pose a bigger threat, Toronto-based DBRS Ltd. announced on Tuesday.
A new report from the Toronto-based rating agency, which evaluates the impact of the big banks’ exposure to the troubled oil and gas sector, finds that the direct effects “appear to be manageable”.
According to the report, lending to the sector represents less than 4% of the major banks’ overall loan portfolios, and the banks’ exposure is minimal in the context of their overall earnings.
Impairments of energy sector loans are increasing, and this is expected to continue in 2016, the DBRS report notes. Yet, the credit rating agency expects the major banks to manage their exposures well. “The banks have already been provisioning for these impaired credits. Even if impaired oil & gas loans increased significantly, the banks would generally have the resources to absorb the increased provisioning out of current earnings,” the DBRS report says.
Moreover, companies in the energy sector have responded to the price pressure with cost cuts, capex reductions, dividend cuts, and asset sales, which are keeping them from running into trouble with their banks, the DBRS report notes. As well, the banks are reportedly working with companies in the sector to bolster their ability to cope with the prolonged decline.
“To the extent that the major banks are able to support the sector in the currently difficult environment, this would facilitate adjustments in other sectors and avoid the abrupt decline that would be precipitated by widespread bankruptcies,” the DBRS report says.
However, the DBRS report also says that the knock-on effects of the slowdown in the energy sector could have bigger impact on their loan books. And, it suggests that the much bigger threat is an overall slowdown in the Canadian economy.
“An actual recession in Canada would prove more challenging for the major banks after a long period of expansion that has been accompanied by a very strong housing market with rapidly rising house prices and a strong pace of real estate development,” the DBRS report warns.