MONEY IN THE BANK

RBC, National Bank report swelling profits in spite of oil industry downturn,

Bank earnings are showing resilience in the face of sliding oil prices and a soft economy, but cracks have appeared in energy loan portfolios and some analysts warn of a gathering storm if the status quo persists.

The fear is that low spot and futures oil prices will fuel a big jump in loan defaults from oilpatch exploration plays and producers, which will cascade across oil-service businesses and consumers.

That, in turn, could trigger deterioration in credit quality and act as a drag on income growth in the key banking sector in the fourth quarter and in 2016.

So far, however, the three banks to report this week said effects of the oil decline and other headwinds — including low interest rates — have been manageable, offset by strong growth in retail mortgage lending and non-oil commercial banking in Canada and the U.S.

The country’s largest lender, Royal Bank of Canada, and sixth-ranked National Bank Financial joined BMO, Canada’s fourth-largest bank, on Wednesday in beating profit forecasts in the fiscal third quarter, based on record growth in domestic lending.

RBC raised its dividend by 2.6 per cent to 79 cents after reporting a 4-per-cent jump in net income for the period ended July 31, to $2.48 billion, or $1.66 a share, from $2.38 billion, or $1.59 a share, a year earlier. Royal Bank shares closed 26 cents lower, however, at $72.10 Wednesday after the bank reported a spike in impaired oil and gas loans. It said oil and gas represents 1.6 per cent of its loan portfolio and the impaired loans rose in the quarter largely on two oil and gas accounts.

RBC cited “conservatism” in mortgage paydowns, but said housing activity has dropped in Alberta and other oil-exposed regions, while Ontario and Quebec are seeing a benefit from lower fuel prices.

RBC, like Bank of Montreal, reported a jump in impaired oil and gas loans, as the category almost quadrupled across the industry, to $183 million from $46 million in the second quarter and $5 million in the first quarter.

National Bank Financial analyst Peter Routledge warned in a note of “storm clouds on the horizon,” with impaired loans to “increase materially in both Canada and the United States” if low oil and gas prices persist through fiscal 2016.

Montreal-based National Bank of Canada also reported adjusted earnings Wednesday that beat estimates — $1.25 a share versus the $1.19 forecast — and kept its dividend unchanged, but said the payout will be reviewed in the fourth quarter.

The company said it has limited exposure to oil regions and says its oil stress tests show manageable loan losses. However, CEO Louis Vachon said domestic growth forecasts and oil prices are a moving target, with the bank in the business of “managing change and managing volatility” in a low-growth environment.

He also said the bank could ease expense growth depending on factors such as Canada’s economic performance and the oil sector outlook.