Canada’s fourth-largest bank will be experiencing more loan losses from energy companies this year and next if oil prices stay low, despite beating analysts’ estimates.
Low oil prices have certainly taken their toll on the Bank of Montreal’s (NYSE:BMO) third-quarter earnings, but shares of the Canadian bank still managed to rise. According to William Downe, BMO’s Chief Executive Officer, the company’s major concerns are a limping Canadian economy and ongoing decline in the energy sector. (Source: Bloomberg, last accessed August 26, 2015.) Nearly all of BMO’s investment weakness is in U.S. markets, where the bank has a substantial presence.
American energy firms tend to have higher debt levels than Canadian ones, and it’s beginning to show through in financial statements north of the border.
BMO’s results indicate how the mounting oil sell-off is affecting Canadian financial institutions, with all major banks being extremely active in the oil and gas sector. Crude oil may have stabilized its apparent nosedive on Monday, but continued oversupply and fears over financial contagion from China’s stock market nightmare are putting relentless downward pressure on oil.
Downe remains optimistic about BMO’s ability to weather the storm. (Source: Bloomberg, last accessed August 26, 2015.) Even if the current oil price environment extends into the medium and long-term, provisions are in place to minimize the bank’s exposure.
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The percentage of oil and gas loans in BMO’s portfolio stands at two percent. But this exposure is healthier than the number may suggest. (Source: Reuters, last accessed August 26, 2015.) More than half the loans are investment grade, and a substantial portion is not linked to energy producers, says Downe.
BMO posted its third-quarter fiscal performance on Tuesday, reporting $79.0 million in gross impaired loans in the energy sector for the period. (Source: BMO, last accessed August 26, 2015.)
But approaching credit issues loom large over the financial sector, as low crude oil prices appear almost certain to continue into 2016. Without any uplift to prices, oil and gas-impaired loan formations will gain momentum and begin inflicting pain on lenders in both the U.S. and Canada.
Oil Price Forecast 2015-2016
Crude oil continued its march into the financial abyss this week, falling by 36% since the peak June prices and seemingly content to hover in the $30.00 range for an indefinite period.
What does this mean for the energy sector?
Downe maintains his optimism, arguing that this prolonged low price environment may be what is needed to lower energy companies’ operating costs. (Source: Bloomberg, last accessed August 26, 2015.) The current budget slashing and reduction in capital expenditures are essentially part of a correction cycle which will ultimately be healthy for oil and gas.
And what can we expect for the Bank of Montreal?
BMO will go on, battered but unbeaten by its exposure to the latest declines in oil prices.