Banks look closely at loan books

The Guardian (Charlottetown) - - BUSINESS - THE CANA­DIAN PRESS

Cana­dian banks are tak­ing a closer look at their loan books in light of con­tin­ued de­clines in the price of crude, with one bank stress-test­ing its oil and gas sec­tor port­fo­lio to see how it would per­form if the com­mod­ity dips as low as US$25 a bar­rel.

“You’ve got to ask your­self, how low could it go?” Bank of Mon­treal’s chief ex­ec­u­tive Bill Downe said as he laid out the bank’s stress test sce­nar­ios dur­ing a con­fer­ence of bank CEOs in Toronto on Tues­day.

Banks use stress tests, which are com­puter-gen­er­ated sim­u­la­tions, to gauge how cer­tain hy­po­thet­i­cal eco­nomic events might im­pact their busi­nesses.

Al­though it is study­ing the worst-case sce­nario of $25 a bar­rel oil, over­all, BMO’s stress tests as­sume an av­er­age price of $35 a bar­rel over the course of the year.

“I rec­og­nize that to­day the price of WTI is below that, but I think that’s a rea­son­able price and as­sump­tion,” said Downe, as crude oil fu­tures were trad­ing close to US$30 a bar­rel.

For 2017 the bank is us­ing $30 a bar­rel oil for its stress tests, and for 2018 it’s con­sid­er­ing the po­ten­tial ef­fects of a $40 a bar­rel sce­nario. Mean­while, Royal Bank (TSX:RY) CEO Dave McKay said he ex­pects oil to start mov­ing back to­wards the $50 a bar­rel range — and maybe slightly above — over the next 18 months.

“It’s a lit­tle softer than any­body pre­dicted right now,” McKay said.

CIBC (TSX:CM) chief ex­ec­u­tive Vic­tor Dodig said the bank’s stress test­ing has shown that if the price of oil re­mains at $30 for three years, the bank will see cu­mu­la­tive loan losses of $650 mil­lion.


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