Canadian banks have $80 billion of exposure to oil including untapped loans

Canada’s top banks have a combined exposure of C$107 billion (USD$80 billion) to the oil and gas industry, inclusive of untapped credit lines, reports Bloomberg.

Canadian Imperial Bank of Commerce said in its earnings call that total exposure to oil and gas firms rose to C$18.7 billion in the first quarter from C$17.3 billion in the previous quarter. The amount includes about C$2 billion of derivatives and other off-balance sheet items.

Toronto-Dominion’s drawn oil and gas loans climbed to C$4.2 billion, or less than 1% of the total outstanding. The Canadian bank had C$9.74 billion of undrawn commitments to pipelines, oil and gas companies, raising its gross exposure to C$16.2 billion.

Scotiabank, Canada’s third-largest lender, has C$17.9 billion in outstanding loans and C$14.1 billion of commitments to the oil and gas industry. About 60% of the drawn exposure is investment grade, compared with about 75% for the undrawn commitments.

Royal Bank, the country’s largest lender, reported that the bank’s wholesale loan book to the oil and gas industry represented about 1.6% of its total, with a dollar value of C$8.4 billion. Gross exposure to oil and gas firms was C$22.1 billion, including C$13.7 billion of undrawn commitments.

Canadian bankers comfortable with the level of exposure

While the dollar amounts of exposure to the oil and gas sector in Canadian banks is large, Canadian bankers comfortable with the numbers.

“We have a very high-quality, high investment-grade portfolio. We do not take subordinated debt levels. We don’t take second-lien loans,” said Chief Financial Officer of Scotiabank Sean McGuckin.

The bank has said that in an extreme-stress scenario, which includes high unemployment in oil-rich Alberta and crude prices staying at $30 per barrel for two years, the bank’s total provision for its credit-loss ratio would increase 0.05-0.1 percentage points, up from its current level of 0.45 percentage point. “That’s a small amount. That’s the disconnect: everybody wants to make it a bigger story than what it is,” McGuckin told The Wall Street Journal.

Other banks also feel they are capable of handling the current lending situation in the oil and gas sector. “The bulk of our undrawn‎ commitments are with higher quality, investment-grade counterparties,” said Kevin Dove, a spokesman for Toronto-based CIBC. “We take both the drawn and undrawn commitments into consideration when we perform our stress tests, and believe our exposure is manageable.”

Some worry that the companies may start to take out their full lines of credit as things worsen, with the banks having little recourse to prevent companies from doing so, said Jason Wangler, an energy analyst at Wunderlich Securities. “They were really lax last year on covenants and it’s starting to cost them,” he said.

Others, like Peter Routledge, an analyst with National Bank Financial, did not think the banks would allow things to get out of hand. “The banks will lower the undrawn commitments before the borrowers go bankrupt,” Routledge said. “There will be some lines cut, so it’s not going to be as big.”

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