While Canada’s biggest banks saw a rise in impaired loans last quarter, a Raymond James analyst says the amount of soured credit issued to the oil and gas sector is at an all-time low.
Canada’s largest banks recently reported financial results for the three months ended July 31. Royal Bank of Canada (RY.TO)(RY), Toronto-Dominion Bank (TD.TO)(TD), Canadian Imperial Bank of Commerce (CM.TO)(CM), and Bank of Montreal (BMO.TO)(BMO) were among the major lenders to raise provisions for bad loans amid forecast slower growth. According to Bloomberg, the amount of impaired loans in the core Canadian banking units of the country’s five largest lenders almost doubled from a year ago.
Raymond James analyst Jeremy McCrea says oil and gas is an increasingly small piece of that pie. In a note to clients on Friday, he says overall lending by Canada’s six biggest banks to the oil and gas sector has fallen by more than half since early 2020, in what he describes as a “remarkable drop.”
“Oil and gas loans make up only 1.8 per cent of all wholesale business loans now. The downward trend seems to be flattening, but still represents a notable drop from five per cent just a few years ago,” he wrote.
“Is this a result of E&P operators not wanting loans, or banks less likely to lend? It’s hard to know, but we suspect there is capacity within the banks if the ‘right operator’ was looking to take on more leverage,” he wrote.
The amount of soured loans to the sector have plunged as well, according to McCrea’s research. He says impaired loans to the oil and gas operators have dropped 94 per cent, from about $2.5 billion in Q3 2020 to $162 million in Q3 2023. That’s “the lowest level we have on record,” he added.
McCrea says the impairment rate of all oil and gas loans is now 0.55 per cent, below the average of all other business loans, at 0.6 per cent, which should give equity investors “more comfort in the sector.”