,l,rHf GL:BE AND MAIL TUESDAY, SEPTEMBER 6,2016 T

STREETWISE ENERGY

Banks won't say oil uncertainty is over yetAnxieties are easing, but when it comes to predicting crude prices, lenders are as useless as everyone else

DAVID BERMANBANKING REPORTER

f anadian bank executives\r made two predictions afterthe price of crude oil fell to rz-year lows early this year andenergy companies struggled tomeet their loan obligations.' The first prediction: The bankshave been through commoditydownturns before and camethrough unscathed. This down-turn would be no exception.

The second: Whatever loanlosses the banks incurred wouldlikely peak in the second quai..ter. .-i

With the banks'fiscal third-quarter financial results now inthe books, both predictions lookbang on. But there's a reason noone has declared an end to theuncertainty over the energy-'ielated fallout: When it comes topredicting oil prices, the banksare as useless as the rest of us.*

The price of crude oil dippedbelow $3o (U.S.) a barrel in lan-uary and February, down frofirmore than $roo a barrel in zor4,raising concerns that the bankswould be on the hook for bill-

"ions of dollars worth of loans toenergy companies if many of

them failed.Oil recovered to more than $So

a barrel in Iune - the midpointof the bank's May-to-July fiscalthird quarter - but the reboundhas since sputtered. Oil tradednear $45 on Friday.

The biggest banks set asideconsiderably less money in thethird quarter to coYer bad loansthan they did in the previousquarter, easing concerns abouttheir exposure for now.

On average, provisions forcredit losses fell by about ro percent. Expressed as a ratio ofoyerall loans, these provisionsfell below o.3 per cent (or 3obasis points), in line with thelong-term average and downfrom nearly o.35 per cent in thesecond quarter.

The money set aside specifical-?y to handle bad loans to theenergy sector fell even more formost banks, quarter over quar-ter. On average, these provisionsfell by more than 6o per cent forthe Big Six.

For Canadian Imperial Bank ofCommerce, provisions for creditlosses to oil and gas companiesfell to just $z-million in thethird quarter, down foom $8i-million in the second quarter.

Royal Bank of Canada's provi-sions fell to ggo-million from$rr5-million.

Bank of Nova Scotia, a biggerconcern heading into the quar-ter given that it had relativelymore outstanding loans to theenergy sector, reported that itsprovisions declined to ggZ-mil-lion from gr5o-million.

If the numbers didn't drivghome the story of an improvingsituation, executives did: "Lastquarter we indicated that ener-gy-related losses had peaked andthat our loss ratio would im-prove, which was indeed thecase this quarter," Brian Porter,Scotiabank's chief executive offi-cer, said in a confergnce callwith analysts. '

Others are suggesting that, fol-lowing a period when bankswere reducing loans to energycompanies, the cutbacks may beover. CIBC increased its loans tooil and gas companies by morethan $soo-million in the thirdquarter. i

Although National Bank ofCanada cut its outstanding loansto oil and gas companies bynearly $4oo-million since thesecond quarter and ggoo-millionyear over year, its chief execu-

tive officer suggested that thenext move could be up.

"We feel we're getting to thebottom of how low we want toget in terms of oil and gas,"Louis Vachon said. He expectsthat "balances in the oil and gasbook should start growing :

again."Nonetheless, the banks aren't

declaring that the threat fromenergy-related losses is over.

"I guess I still remain cau-tious," Mark Hughes, chief riskofficer at Royal Bank of Canada,said during a conference call.The improvement of oil prices,he added, is merely "helpful."

Asked in an interview whetherthe worst is over, Riaz Ahmed,chief financial officer at Toronto-Dominion Bank, responded:"Who knows? Some people willgive you oil and gas prices asbeing fundamentally driven andsome see them as more politi-cally driven and some of thembelieve they are driven byevents. All three are true, so youcan't know exactly where oiland gas prices will be.

"I hope that the worst isbehind us," Mr. Ahmed said."But I can't make the call onthat."