How falling oil affects the big banks

Falling oil prices are not expected to materially impact loan growth at the Canadian banks, but it could be a headwind to underwriting revenues, says a new report from Scotia Capital Inc.

“Though an extended period of weakness in energy prices would clearly impact credit quality trends, in our view the size of the portfolio is not large enough to materially weigh on either credit or growth trends,” said analyst Sumit Malhotra in a note to clients.

Mr. Malhotra said bank loans to the energy sector made up just 6% of total business loans and 2% of the entire portfolio at the Big Six banks as of the third quarter. In addition, he said the health of the energy portfolio is “pristine,” with the current 22-basis-point non-performing loan (NPL) ratio considerably below the aggregate 83-basis-point rate on the business book as a whole.

If there is a concern related to falling oil prices, it is their potential impact on investment banking, the analyst said. By his estimate, energy has accounted for about 30% of year-to-date underwriting revenue for the banks.

“Though the capital market units of the banks are much more diversified than those of the independents, as evidenced by the delay in the Teine IPO, softness in the crude quote can very quickly impact the ability/willingness of issuers to come to market,” he said.

He believes sentiment toward Canadian Western Bank is most affected by weakness in energy prices.