Prolonged Low Oil Prices Will Have A Bigger Impact On Canadian Banks Than US - Moody's

A prolonged period of low oil prices will negatively impact the Canadian banks, according to a new report by Moody’s. The impact on the U.S. banks is said to be limited. The commodity prices have been continuously falling for the past few months due to a supply glut in the market.

Moody’s is a bonds credit rating agency that comes out with reports on markets for its subscribers. According to a recent announcement from the company, the profitability of some of the big Canadian banks will be negatively impacted if the low oil prices continue for long. The low price of the commodity will also impact the asset quality of some of the regional banks in the U.S.

According to the report, Moody's Senior Vice President David Beattie has stated that the credit costs on energy sector loans will rise in Canada if the oil prices continue to remain low and this would “hurt the banks’ profitability.” He expects “mild erosion” in the asset quality of the banks in the coming months.

The banks could also lose revenues from underwriting and other capital market activities if the major companies in the oil and gas sector cut their spending. Companies in the U.S and Canada have made capital spending cuts in the past few months and there have been thousands of reported layoffs in the industry.

The Moody’s report further notes that apart from the institutional clients of the banks, individual customers may also be impacted. Consumer credit costs in oil producing provinces of Canada may rise. The report mentions a “slowdown” in Alberta, Saskatchewan and Newfoundland.

The report however notes that Canada’s Big Six banks are better equipped to deal with any adverse impact of low oil prices due to the diversity in their portfolio. This diversity is expected to act as a “shock absorber” for the banks. The banks may also benefit from the depreciation of Canada’s currency. The two banks that are said to be “particularly vulnerable” are Bank of Nova Scotia and Royal Bank of Canada.

A prolonged period of low oil prices may however increase the risks for the banks. According to the Moody’s report, such a situation will increase the credit risk of “for even the most conservatively underwritten energy-related loans.”

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