Big Six see surge in energy loan exposure

Oil firms battle plunging prices, tap credit lines to tune of $71.6B in Q2

Canadian banks’ exposure to oil-and-gas loans has surged to a record as energy firms tapped credit lines to combat plunging oil prices.

Energy loans at the country’s six largest lenders jumped 23 per cent to $71.6 billion in their fiscal second quarter from the prior period, disclosures show. Toronto-Dominion Bank had the largest increase at 29 per cent, while Bank of Nova Scotia remained the biggest lender with $21.6 billion in loans.

The banks’ rising exposure comes as impaired energy loans almost doubled, topping $2 billion. Energy firms have been hard hit this year as global oil prices plummeted, with some grades even briefly turning negative in April as measures to combat the spread of the coronavirus hammered worldwide demand.

With the price plunge making much of their output unprofitable, Canadian oil and gas producers have taken steps to conserve cash. They’ve reduced production, cut operating costs, slashed at least $8.5 billion in planned capital spending and tapped credit lines to help them weather the downturn.

Those drawdowns were the main reason for the 22 per cent increase in energy lending at Royal Bank of Canada, according to CFO Rod Bolger.

Most of Royal Bank’s exposure is to exploration and production companies and loans are secured by the value of proven and producing reserves, Bolger said.

Still, the Toronto-based lender had the highest gross impaired loans among the Canadian banks, at $664 million.

Bank of Montreal posted the second-highest total for impaired energy loans, at $616 million.

Canadian Imperial Bank of Commerce CFO Hratch Panossian said he is seeing more downgrades and impairments in the oil-and-gas sector, reflecting price weakness, but called the bank’s energy portfolio “relatively stable.”

Scotiabank’s chief risk officer Daniel Moore said on a May 26 earnings call that exploration and production and oilfield services — which are most sensitive to weakness in oil prices — account for 1.7 per cent of total loans. More than 40 per cent of those energy loans are investment grade and the majority of non-investment grade exposure is to secure reserve-based loans or sovereign-controlled entities, he said.