Untapped loans double Canadian banks oil exposure to $107 billion

Canadian banks’ exposure to the struggling oil-and-gas industry totals $107 billion when including untapped lines of credit 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 provide exposure by means of commitments, for example lines of credit. They are able to potentially increase a bank’s risk, because the weakest borrowers often tap all of their credit line when nearing default. The banks’ exposure to oil-and-gas companies from outstanding loans and commitments vary from about $5 billion for National Bank of Canada to $32 billion for Bank of Quebec.

Borrowing the entire amount before the credit line is cut helps companies preserve liquidity to help keep paying their bills, and provides them leverage to barter with their creditors. For instance, Royal Bank is among the lead lenders to SandRidge Energy Inc., which drew its entire $500 million line of credit 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 pays or an agreement is reached using its lenders.

‘Really Lax’

“The banks really do not possess a lot of recourse to prevent you from drawing the loan line,” said Jason Wangler, an energy analyst at Wunderlich Securities in Houston. “They were really lax this past year on covenants and it is beginning 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 which have lent money to energy firms. European banks disclosed throughout the most recent earnings season they have almost $200 billion in oil-and-gas loans, while U.S. banks have an estimated $123 billion of outstanding loans and commitments towards the industry.

Canadian banks collectively set aside $259 million in provisions for the oil-and-gas industry in the quarter, a lot more than the $215 million reserved for all of 2015, based on company disclosures.

Including oil-and-gas lending commitments overstates the banks’ risks, since the borrowers might not fully draw down those lines of credit in times of trouble, said Peter Routledge, an analyst with National Bank Financial.

Reduced Credit

“The banks will lower the undrawn commitments prior to 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 last period. That includes about $2 billion of derivatives and other off-balance sheet items, and it is more than double the bank’s $6.9 billion of remarkable loans, based on company disclosures.

“The majority of our undrawn? commitments are with high quality, investment-grade counterparties,” said Kevin Dove, a spokesman for Toronto-based CIBC. “We take both drawn and undrawn commitments into consideration whenever we perform our stress tests, and believe our exposure is manageable.”

‘Very Comfortable’

Scotiabank, Canada’s third-largest lender, has the highest credit contact with oil-and-gas, including $17.9 billion in outstanding loans and $14.1 billion of commitments, based on March 1 disclosures. About 60 % from the drawn exposure is investment grade, in contrast to about 75 percent for that undrawn commitments, the financial institution said.

“When you out an investment grade, what’s left is an extremely 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 perform a name-by-name analysis regularly and we’ve got a great 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 the bank’s drawn wholesale loan book towards the oil-and-gas industry represented about 1.6 % of their total, with an accompanying presentation showing the total amount was $8.4 billion. Gross contact with oil-and-gas firms was $22.1 billion, including $13.7 billion of undrawn commitments, according to a report to shareholders.

TD, BMO

“The vast majority of our clients’ credit profiles are strong and have remained stable over the past year,” Hughes said within an e-mailed statement. “We have covenants in position as safeguards, such as liquidity and coverage requirements, which serve to restrict drawings when in stress. When the company can demonstrate their compliance with one of these requirements, they are able to continue to draw on their facilities.”

Toronto-Dominion’s drawn gas-and-oil loans climbed to $4.2 billion, or less than 1 % from the total outstanding, based on a Feb. 25 presentation. Canada’s second-largest lender had $9.74 billion of undrawn commitments to pipelines, oil, and gas companies to boost 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 inside a Feb. 25 phone interview.

Oil-and-gas loans at Bank of Montreal were $7.4 billion within the first quarter, representing a couple of percent of their portfolio, the Toronto-based firm said in a Feb. 23 disclosure. The undrawn exposure implies that the lender had one more $8.24 billion of undrawn commitments, raising its exposure to $16.3 billion.

“We assess the risk on both drawn and undrawn basis,” Ceo Bill Downe said in a Feb. 29 interview in a conference in Florida. “We think that lines is going to be drawn under periods of stress. I believe our disclosure is fair.”

National Bank reported $3.2 billion of remarkable oil-and-gas loans within the first quarter, a “low and manageable” exposure representing about 2.7 percent of its loan book, Chief Risk Officer William Bonnell said throughout 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.

Bloomberg.com