The Bank of Nova Scotia (NYSE:BNS) could be forced to cut its BNS stock dividend if oil prices continue to slump, Moody’s warns.
In a report released on Monday, the New York-based ratings company said that Canada’s third-largest lender by assets would be hit hard by the sharply worse oil rout. So, too, would Canadian Imperial Bank of Commerce (NYSE:CM) the nation’s fifth-largest bank.
On the other hand, Toronto-Dominion Bank (NYSE:TD), Canada’s second-largest bank, would best be able to weather a deterioration, according to Moody’s.
The rating agency said that under its severe stress scenario, The Bank of Nova Scotia (Scotiabank) and the Canadian Imperial Bank of Commerce (CIBC) may be required to take capital conservation measures, cut dividends, or sell more shares.
Scotiabank would face higher stress losses from its corporate loan book and the segment mix of its corporate loans, according to the report. (Source: “Canada’s banks could be forced to raise equity, cut dividends if oil prices keep sinking, Moody’s warns,” Financial Post, February 22, 2016.)
The Toronto-based lender has higher exposure to oilfield services, such as drilling rigs.
However, David Beattie, a senior vice-president at Moody’s who wrote the report, admitted the likelihood of dividend cuts is remote. He noted that the banks would want to avoid taking such drastic action except under extreme circumstances. (Source: Ibid.)
Bank of Nova Scotia, whose BNS stock has an attractive price-to-earnings (P/E) ratio of below 10, boosted its dividend to CA$0.70 per share, up from CA$0.68 per share, during its most recent quarter.
Moody’s said in its report that the slump in oil prices will increase the financial stress on oil producers and drillers, and the service companies that support them. It will also have an impact on consumers in oil-producing provinces; thus, the banks’ losses in related areas will increase.
The Canadian economy, the world’s 11th-largest, is struggling, as the price of oil, the economy’s major export, nosedived from a post-financial crisis peak of $114.00 per barrel in mid-2014 to a 12-year low of $26.00 per barrel last month.
The oil-producing Western provinces were the most hit by the crude slump. Alberta’s jobless rate has jumped from 4.6% a year earlier to 7.4%, exceeding the national average of 7.1% for the first time in nearly two decades.
Scotiabank’s U.S.-listed shares have fallen from a high of $68.00 in the summer of 2014 to $40.00 currently, a 41% drop.
Scotiabank is due to release its fiscal first-quarter results before markets open next Tuesday, rounding out the Canadian bank’s earnings season.