Canadian banks have increased their lending to oil and gas companies at double the rate of total business loan growth over the past three quarters, raising the prospect of big loan losses after Monday’s global oil price crash.
The pick-up in energy lending at Canada’s six main banks has come even as bad loans and provisions for losses from the sector have climbed, data from Reuters shows. Banks’ energy-related credit-loss provisions this year have climbed to the highest levels since 2016, while loan losses hit the highest in over two years in late 2019. On Monday, the Canadian bank sub-index fell 11.2% on concerns about oil and gas loan losses.
Oil prices had their biggest one-day rout since the 1991 Gulf War on Monday after Saudi Arabia and Russia signaled they would hike output. Bank of Montreal’s (T.BMO)lending to the energy sector led the growth in the year to January 31 with a 42% increase; TD Bank’s (T.TD) grew 31% and Royal Bank of Canada’s (T.RY) rose 17%.
Oil and gas loan losses across Canada’s banks stood at about 1.7% in the first quarter compared with 0.69% across all business loans. Banks are already bracing for margin pressures after Canadian and U.S. central banks last week cut interest rates 50 basis points in response to the coronavirus outbreak.
