Canadian banks’ exposure to the struggling oil-and-gas industry totals $107 billion when including untapped credit lines with outstanding loans, according to a review of company filings.
That’s double the $50 billion in total 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 as of Jan. 31.
That only describes part of the picture.
The banks also have exposure in the form of commitments, such as credit lines. They can potentially increase a bank’s risk, because the weakest borrowers often tap their entire credit line 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 Nova Scotia.
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 with their creditors. For example, Royal Bank is among the lead lenders to SandRidge Energy Inc., which drew its entire $500 million credit line 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 an agreement is reached with its lenders.
“The banks really don’t have a lot of recourse to prevent you from drawing the credit line,” said Jason Wangler, an energy analyst at Wunderlich Securities in Houston. “They were really lax last year on covenants and it’s starting to cost them.”
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Oil prices have fallen about 68 percent from a 2014 peak, putting pressure on financial institutions around the world that have lent money to energy firms. European banks disclosed during the most recent 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 set aside $259 million in provisions for the oil-and-gas industry in the quarter, more than the $215 million reserved for all of 2015, according to company disclosures.
Including oil-and-gas lending commitments overstates the banks’ risks, since the borrowers may not fully draw down those credit lines in times of trouble, said Peter Routledge, an analyst with National Bank Financial.
“The banks will lower the undrawn commitments before the borrowers go bankrupt,” 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 previous period. That 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 bulk of our undrawn commitments are with higher quality, investment-grade counterparties,” said Kevin Dove, a spokesman for Toronto-based CIBC. “We take both the drawn and undrawn commitments into consideration when we perform our stress tests, and believe our exposure is manageable.”
Scotiabank, Canada’s third-largest lender, has 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 percent of the drawn exposure is investment grade, compared with about 75 percent for the undrawn commitments, the bank said.
“When you back out the investment grade, what’s left is a very small portion that is an area 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 on a regular basis and we’ve got a good handle on this portfolio.”
Royal Bank, Canada’s largest lender, had the second-highest exposure. Chief Risk Officer Mark Hughes said on a Feb. 24 call that the bank’s drawn wholesale loan book to the oil-and-gas industry represented about 1.6 percent of its total, with an accompanying presentation showing the amount was $8.4 billion. Gross exposure to oil-and-gas firms was $22.1 billion, including $13.7 billion of undrawn commitments, according to a report to shareholders.
“The vast majority of our clients’ credit profiles are strong and have remained stable over the past year,” Hughes said in an e-mailed statement. “We have covenants in place as safeguards, such as liquidity and coverage requirements, which serve to restrict drawings in times of stress. If the company can demonstrate their compliance with these requirements, they can continue to 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, according to a Feb. 25 presentation. Canada’s second-largest lender had $9.74 billion of undrawn commitments to pipelines, oil, and gas companies to raise its gross exposure to $16.2 billion, according to financial supplements.
“We do remain very comfortable because our oil and gas exposure is below our peers,” CFO Riaz Ahmed said in a Feb. 25 phone interview.
Oil-and-gas loans at Bank of Montreal were $7.4 billion in the first quarter, representing about 2 percent of its portfolio, the Toronto-based firm said in a Feb. 23 disclosure. The undrawn exposure shows that the lender had an additional $8.24 billion of undrawn commitments, raising its exposure to $16.3 billion.
“We evaluate the risk on both drawn and undrawn basis,” Chief Executive Officer Bill Downe said in a Feb. 29 interview at a conference in Florida. “We assume that lines will be drawn under periods of stress. I think our disclosure is fair.”
National Bank reported $3.2 billion of outstanding oil-and-gas loans in the first quarter, a “low and manageable” exposure representing about 2.7 percent of its loan book, Chief Risk Officer William Bonnell said during 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.