Some Canadian banks might have to boost capital, cut their dividends, or raise equity should the oil industry come under severe stress, warns New York City -based Moody’s Investors Service in a report published on Monday.
The credit rating agency’s latest oil price stress tests finds that Canada’s big banks would face some profit pressure, but that their capital positions would be fine, under a moderate stress scenario. However, if the energy sector comes under severe stress, some banks might have to take capital conservation measures, reduce dividends, or raise additional equity, the Moody’s report says.
“The deterioration in oil prices will increase financial stress on Canada’s oil producers, drillers and service companies that support them, as well as on consumers in the country’s oil-producing provinces,” says David Beattie, senior vice president at Moody’s. “Correspondingly, banks’ losses in their oil-related corporate and consumer portfolios are expected to increase, and their capital markets income are expected to decline.”
The banks facing the biggest impact would be Canadian Imperial Bank of Commerce (CIBC) and Bank of Nova Scotia, the Moody’s report says, as they were “negative outliers” in its stress testing. “The results for CIBC reflected the banks’ primarily domestic nature of its operations, a considerable oil and gas concentration in its corporate loan book as well as high reliance on earnings coming from capital markets activities,” the Moody’s report adds.
For Scotia, the bank’s negative results were “attributable to the banks’ higher stress losses from its oil and gas loan book (relative to tier one common equity) compared with peers and segment mix of its corporate loans which is skewed toward oilfield services, the subsector with the lowest assumed median rating,” the Moody’s report says.
Toronto-Dominion Bank performed best in the rating agency’s stress tests, which the Moody’s report attributes to the bank’s “relatively small oil and gas corporate loan book as well as a comparatively low concentration of retail operations in oil-producing provinces and low reliance on capital markets earnings.”
Four of Canada’s big banks release their first-quarter results later this week.