RISK: First effects of Oil and Gas on Banks are manageable, says DBRS

"Concern over bank credit exposures to the oil and gas sector has increased"

Ratings agency DBRS says the first round effects of the deterioration in the oil and gas sector on major banks in Canada appear to be manageable. In its latest edition of Beyond the Rating, it considers a much bigger challenge for the banks is ”if the weakness in the energy sector combines with weakness in other global economic factors to significantly slow the growth of the overall Canadian economy.”

“Concern over bank credit exposures to the oil and gas sector has increased,” says DBRS, “as the sharp drop in oil prices has abruptly halted the sustained expansion of major bank lending to this sector. Oil and gas lending appears to have peaked during 2015. Specifically, drawn exposure totalled $45 billion at for the major banks at October 31, 2015, an increase of $22 billion, up almost 95 percent from its low of $23 billion in 2010.”

The report concedes that lending to the oil and gas sector has grown steadily in recent years, but still only accounts for moderate amounts of the major banks’ overall loan portfolios.

“In addition to their outstanding loans,” says DBRS, “the large Canadian banks also have sizeable exposure through unused lines, as well as much smaller off‐balance sheet and derivatives exposures. The unused portions of existing lines are often at least as much or more than the drawn portions. The potential exposure of the major banks is thus notionally considerably greater than their actual outstanding exposures. Banks are unlikely, however, to experience the full usage of the unused portions. Even companies that are in difficulty may not use their unused portions to avoid increasing their debt burden.”

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