CALGARY C Prices for used industrial equipment in Western Canada are falling as banks look for a method of getting money out of progressively more delinquent loans in oil-producing provinces.
“Recent auction results have included generally softer pricing in secondary markets, designed for specialized equipment,” Canadian Western Bank president and CEO Chris Fowler said during his company’s quarterly earnings call a week ago.
The Edmonton-headquartered bank uses auctions as a way to secure its loans, specifically for industrial equipment, and Fowler said that, during previous quarters, prices remained high at industrial auctions despite the dramatic fall in oil prices as well as an overall slowdown in industrial activity in Alberta and Saskatchewan.
But the marketplace for buying and selling used equipment has now changed – and prices are falling.
“The cross-purpose yellow iron that can be used in forestry, gas and oil, municipal infrastructure, were down definitely, but not significantly. It was the more specialized equipment (where prices fell further),” Fowler said.
When a borrower does not meet its payment obligations, a bank can proceed to sell that equipment on “secondary markets” at auction houses, making the need for a company’s equipment instrumental to a application for the loan.
“If there is a lower valuation, once we consider what secondary financial markets are like, it does affect the approach we take to take a look at (loans), no doubt,” Fowler said.
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At the end of February, Ritchie Bros. Auctioneers held a major industrial auction at its yard immediately south of Alberta’s capital, where its auctioneers sold 7,300 items for $120 million.
By comparison, the auction company sold 7,700 items at the same auction yard after April 2015 for $215 million – setting multiple records for the company in Canada and surprising many buyers and sellers for that high prices that the equipment fetched.
Industrial companies in Alberta and Saskatchewan happen to be liquidating an increasing number of items at auctions as the rout in oil prices has continued.
CWB Group, which utilizes Oct. 31 as its financial year-end, reported the value of its impaired loans rose 49.6 per cent, from $30.2 million within the first quarter of 2015 to $45.2 million within the first quarter of this year.
Alberta represents 41 percent of the bank’s total impaired loans.
“The Canadian economy continues to adapt to the impacts of low oil prices and we’re working proactively with our clients, specifically in Alberta and Saskatchewan, to deal with related operating challenges,” Fowler said in a statement.
Fowler stressed around the company’s earnings call that the “relatively small” proportion, roughly five per cent, from the bank’s overall loans were directly subjected to the power sector.
The company did note, however, that “loan development in Alberta and Saskatchewan is anticipated to slow compared to prior years due to the economic impact of low oil prices.”
As a result, the organization is lending more income in Bc and Ontario in an attempt to expand its business across the nation.
To that end, the bank also closed its acquisition of Maxium Financial Services Inc. for $120 million on March 1. The majority of Maxium’s business is in Ontario, that ought to help expand CWB’s loan book within the province.
BMO Capital Markets released a note a week ago that said CWB’s profitability and earnings growth during the period of this season and next are required to fall because of higher expenses, partly from credit losses and impaired loans.
The bank taken in earnings of $144 million in its first quarter, up seven per cent from the same period a year ago, though its earnings per share held steady at 65 cents for that period.
Financial Post
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