TORONTO — Canadian banks are taking a hard look at their energy and consumer loans as they brace for the possibility of a prolonged period of depressed oil prices.
The chief executive of Royal Bank of Canada (TSX:RY) said the lender will begin testing its $9.6-billion portfolio of energy-related loans to see how it will perform if oil prices remain around $45 a barrel for extended time.
Dave McKay says the bank has already tested how the portfolio would fare if oil prices hovered around $60 per barrel and is comfortable with the results. But, given the continued drop in oil prices, the bank will be retesting for $45 a barrel, McKay told a conference of Canadian bank CEOs on Wednesday.
Canadian banks are also monitoring their portfolios of consumer loans in Western Canada, including credit cards and mortgages, which could be at risk if the drop in oil prices leads to job losses.
Bill Downe, chief executive of the Bank of Montreal (TSX:BMO), says 20 per cent of the lender’s consumer loans are in the West.
Downe says he expects to see the number of customers who are unable to pay their credit card and mortgage loans rise, although the change is likely still a quarter away.
However, the greater impact will be on the bank’s growth prospects, particularly in consumer lending, he said.
“The major cities in Alberta and Saskatchewan are going to feel a contraction,” said Downe.
“The impact on loan loss provisions is not going to be so great, but growth in consumer borrowing in Canada is going to be lower. We had anticipated it was moderating in any case. It’s going to be lower in 2015 and 2016 as a consequence.”
The price of oil has been cut in half over the past six months and traded in recent days at its lowest levels since the spring of 2009.
Suncor, one of Canada’s largest energy companies, said Tuesday it was cutting 1,000 jobs and reducing its capital budget by $1 billion due to the drop in oil prices. The move followed an announcement last week by Shell Canada that it was cutting its workforce at its Albian Sands oilsands operation.
However, McKay said RBC expects to reap some benefits from the lower oil price, as well. He predicts the bank’s commercial lending business in Ontario will see higher revenues, as the weaker loonie boosts exports to the U.S. and leads to growth in that part of the country.
RBC also expects lower oil prices will boost economic conditions in the Caribbean — a region that is a net importer of oil — and will aid RBC’s businesses there.