BANKS COPING WITH LOAN LOSSES

‘HIGH WATER MARK’

Three of Canada’s big banks disclosed higher impaired loans and loan loss provisions related to weakness in the oilpatch on Thursday, but the financial damage was not as extensive as many had feared, with one bank suggesting a “high water mark” may have been reached.

Among the second quarter financial results released Thursday by Royal Bank of Canada, Toronto- Domin

ion Bank, and Canadian Imperial Bank of Com

merce, CIBC stood out with provisions for credit losses jumping to $284 million for the period that ended April 30. That was an increase of 47 per cent from $193 million in the first quarter.

“We did expect to see higher losses this quarter,” CIBC’s chief risk officer Laura Dottori-Attanasio told analysts on a conference call.

CIBC executives said a single troubled client in the energy sector contributed significantly to the funds set aside for soured loans in the second quarter, and that the spike does not indicate a pattern that should be expected in the months ahead.

“This quarter does feel like a high water mark as it relates to our loan losses,” Dottori-Attanasio said.

Still, the recent strength in the price of oil, which broke through the key barrier of $50 a barrel on Thursday, isn’t enough to turn the sector’s woes, she said. For that to happen, the oil price would need to rise to $55 a barrel, gas would have to climb to between $2.75 and $3, and those price levels would need to be sustained or topped for nine to 12 months.

In the meantime, CIBC has been assessing the creditworthiness of its clients, and now rates 63 per cent of its direct exposure to oil and gas as investment grade, down from 74 per cent.

Canada’s fifth-largest bank also reported increased write-offs tied to credit cards and personal lending.

Royal Bank of Canada, which also reported secondquarter financial results Thursday, posted a sharp increase of $583 million in gross impaired loans, up 19 per cent, largely due to problems in the oil and gas sector. However, Canada’s largest bank did not take a proportionate increase in provisions for credit losses, a decision executives said was due to the value of the bank’s collateral and its senior position among lenders.

RBC did boost its collective allowance by $50 million, reflecting provisions for troubled loans that have not yet been identified as impaired. The bank’s total provisions for credit losses came in at $460 million, up 12 per cent from the first quarter.

Like CIBC, Royal Bank and TD revealed signs of stress in their credit card portfolios during the second quarter. But executives told analysts the upticks in provisions for credit losses are largely tied to Alberta, with little sign of contagion outside the oil-dependent provinces.

Toronto-Dominion Bank chief executive Bharat Masrani echoed the comments of executives at the other large banks when he told analysts on an afternoon conference call that he believes the bank has made adequate provisions to manage all expected losses.

John Aiken, an analyst at Barclays Capital, said the second-quarter reports should ease investor concerns, particularly when it comes to Royal Bank, which has “higher-than-average exposure” to Canadian consumer credit and energy lending.

“Moderation on the consumer book and the build-up of reserves will likely ease concerns in the near term,” Aiken wrote in a note to clients.

Despite the rise in soured loans tied to the energy sector, the four Canadian banks that reported second-quarter earnings this week all ex- ceeded analysts’ earnings forecasts.

Royal Bank posted net income of over $2.57 billion ($1.66 per share), up three per cent from a year earlier, driven by improvement in most business segments with the exception of the capital markets division.

RBC also pushed a key measure of its capital position above the closely watched threshold of 10 per cent. The CET1 capital cushion now sits at 10.3 per cent.

CIBC posted net income of $941 million ($2.35 a share), up from $911 million ($2.25) a year earlier. The bank also raised the quarterly dividend by three cents, or 2.5 per cent, to $1.21 per share.

Toronto-Dominion Bank reported increased profit of $2.05 billion ($1.07) in second-quarter, up from $1.86 billion (97 cents) in the corresponding period last year. The gain was in spite of a $116-million impairment charge on TD’s struggling European direct-trading business.

“TD came in ahead of expectations as provisions were lighter than expected on the back of an improving U.S. consumer experience, despite seeing similar energyrelated impairment inflation as peers,” said Aiken, the Barclays analyst.

Bank of Montreal kicked off the latest earnings season when it reported secondquarter financial results Wednesday. Bank of Nova Scotia, which is believed to have the largest direct exposure to the oilpatch, will report its second-quarter results on Tuesday.

THE BUILD-UP OF RESERVES WILL LIKELY EASE CONCERNS.