A second Canadian bank has taken the rare step of pre-announcing provisions for losses due to low energy prices, and analysts predict there may be more to come as banks feel the impact of the prolonged downturn on their bottom lines.
National Bank of Canada disclosed Thursday it expects to record specific provisions for credit losses of $17 million, and sectoral provisions of $250 million, both pre-tax, on its oil and gas portfolio in the second quarter.
Full quarterly results won’t be announced until June 1, but the provisions are expected to reduce earnings per share by about 54 cents. Analysts had been calling for earnings of around $1.14.
Canadian Western Bank reignites concerns about energy loan losses at big banks
“The impact of low oil prices continues to take its toll on Canadian banks,” Barclays Capital analyst John Aiken said in a note to clients Thursday.
He called National Bank “another casualty of low oil prices,” referring to pre-released expectations from Canadian Western Bank earlier this week.
Edmonton-based Canadian Western Bank, which has heavier exposure to the oil-dependent province of Alberta, quadrupled Aiken’s expectations for consolidated provisions for credit losses in the quarter to $40-million, mostly related to energy.
Canadian Western Bank also cranked up its full-year loan loss guidance to a range of 35 to 45 basis points from 18 to 23 basis points.
There is “more still likely to come,” Aiken wrote in his note to clients on Thursday.
Peter Routledge, an analyst at National Bank Financial, said other banks could opt to pre-release oil and gas related provisions for credit losses, with Bank of Nova Scotia and Canadian Imperial Bank of Commerce the most likely of the Big Five banks to do so. Second quarter financial results will be reported later this month, beginning with Bank of Montreal on May 25.
Despite recent signs of a possible recovery in the battered oil price, analysts say the pain is not over for banks or shareholders of the financial institutions.
“As the market digests whether this is the last of it, we anticipate the (National Bank) stock to retrace on today’s announcement, and in the coming weeks … as capital will remain top of mind with investors,” Aiken wrote in his note to clients.
National Bank, which already had the lowest closely watched CET1 capital ratio among Canada’s big banks, expects the newly disclosed provisions to result in a 16 basis point hit to the ratio, which is a key measure of a bank’s capital cushion.
However, Canada’s sixth largest bank has also lowered annual credit loss guidance because the loan portfolio excluding oil and gas is performing as expected. The earlier range of 25 to 35 basis points was reduced on Thursday to 20 to 30 basis points.