Canadian banks’ contact with the struggling oil-and-gas industry totals $107 billion when including untapped credit lines with outstanding loans, based on a review of company filings.
That’s double the amount $50 billion as a whole outstanding loans generally highlighted by Royal Bank of Canada, Toronto-Dominion Bank and the country’s four other large lenders in quarterly earnings calls and presentations. The figure represented 2 percent of total lending by Jan. 31.
That only describes area of the picture.
The banks also have exposure by means of commitments, for example credit lines. They can potentially increase a bank’s risk, because the weakest borrowers often tap their entire line of credit when nearing default. The banks’ exposure to oil-and-gas companies from outstanding loans and commitments range from about $5 billion for National Bank of Canada to $32 billion for Bank of Quebec.
Borrowing the full amount before the credit line is cut helps companies preserve liquidity to keep paying their bills, and gives them leverage to negotiate using their creditors. For instance, Royal Bank is probably the lead lenders to SandRidge Energy Inc., which drew its entire $500 million line of credit in January. The Oklahoma City-based company then missed a bond interest payment on Feb. 16, starting a 30-day countdown to default unless the coupon is paid or perhaps an agreement is reached with its lenders.
‘Really Lax’
“The banks really don’t possess a large amount of recourse to prevent you from drawing the credit line,” said Jason Wangler, a power analyst at Wunderlich Securities in Houston. “They were really lax this past year on covenants and it is starting to cost them.”
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Oil prices have fallen about 68 percent from a 2014 peak, putting pressure on financial institutions all over the world which have lent money to energy firms. European banks disclosed throughout the newest earnings season that they have almost $200 billion in oil-and-gas loans, while U.S. banks have an estimated $123 billion of outstanding loans and commitments to the industry.
Canadian banks collectively put aside $259 million in provisions for that oil-and-gas industry in the quarter, more than the $215 million restricted to all 2015, based on company disclosures.
Including oil-and-gas lending commitments overstates the banks’ risks, since the borrowers might not fully draw down those lines of credit in times of trouble, said Peter Routledge, an analyst with National Bank Financial.
Reduced Credit
“The banks will lower the undrawn commitments prior to the borrowers go under,” Routledge said in an interview. “There will be some lines cut so it’s not going to be as big.”
Canadian Imperial Bank of Commerce said on a Feb. 25 earnings call that total exposure to oil-and-gas firms rose to $18.7 billion in the first quarter from $17.3 billion in the last period. Which includes about $2 billion of derivatives and other off-balance sheet items, and is more than double the bank’s $6.9 billion of outstanding loans, according to company disclosures.
“The majority of our undrawn? commitments are with higher quality, investment-grade counterparties,” said Kevin Dove, a spokesman for Toronto-based CIBC. “We take both drawn and undrawn commitments into account when we perform our stress tests, and believe our exposure is manageable.”
‘Very Comfortable’
Scotiabank, Canada’s third-largest lender, has got the highest credit exposure to oil-and-gas, including $17.9 billion in outstanding loans and $14.1 billion of commitments, according to March 1 disclosures. About 60 % from the drawn exposure is investment grade, in contrast to about 75 % for that undrawn commitments, the bank said.
“When you out the investment grade, what remains is a very small portion that is a place of focus, but we’re very comfortable,” Chief Financial Officer Sean McGuckin said Tuesday in telephone interview from Toronto. “We do a name-by-name analysis regularly and we’ve got a great handle about this portfolio.”
Royal Bank, Canada’s largest lender, had the second-highest exposure. Chief Risk Officer Mark Hughes said on the Feb. 24 call the bank’s drawn wholesale loan book to the oil-and-gas industry represented about 1.6 percent of their total, with an accompanying presentation showing the total amount was $8.4 billion. Gross contact with oil-and-gas firms was $22.1 billion, including $13.7 billion of undrawn commitments, based on a report to shareholders.
TD, BMO
“The majority of our clients’ credit profiles are strong and also have remained stable over the past year,” Hughes said within an e-mailed statement. “We have covenants in place as safeguards, for example liquidity and coverage requirements, which actually restrict drawings in times of stress. When the company can demonstrate their compliance with one of these requirements, they can still draw on their facilities.”
Toronto-Dominion’s drawn gas-and-oil loans climbed to $4.2 billion, or less than 1 percent of the total outstanding, based on a Feb. 25 presentation. Canada’s second-largest lender had $9.74 billion of undrawn commitments to pipelines, oil, and gas companies to boost its gross contact with $16.2 billion, based on financial supplements.
“We do remain very comfortable because our oil and gas exposure is below our peers,” CFO Riaz Ahmed said inside a Feb. 25 phone interview.
Oil-and-gas loans at Bank of Montreal were $7.4 billion within the first quarter, representing about 2 percent of its portfolio, the Toronto-based firm said inside a Feb. 23 disclosure. The undrawn exposure shows that the lender had one more $8.24 billion of undrawn commitments, raising its contact with $16.3 billion.
“We assess the risk on both drawn and undrawn basis,” Chief Executive Officer Bill Downe said in a Feb. 29 interview in a conference in Florida. “We assume that lines is going to be drawn under periods of stress. I believe our disclosure is fair.”
National Bank reported $3.2 billion of outstanding oil-and-gas loans within the first quarter, a “low and manageable” exposure representing a couple of.7 percent of their loan book, Chief Risk Officer William Bonnell said throughout a Feb. 23 earnings call. Total exposure including undrawn facilities was about $5 billion, he said in the call. Claude Breton, a National Bank spokesman, declined further comment.
Bloomberg.com
