BUSINESS

Canadian Banks To Show Signs Of Stress As Oil Rout Continues, Moody's Says

11/04/2015 08:20 EST | Updated 11/04/2016 05:12 EDT
TORONTO — Moody's Investors Service says the impact of low oil prices on the consumer loan books of Canadian banks is likely to start showing when the lenders report their fourth quarter earnings next month.

The banks saw impaired loans to the oil and gas sector tick higher in the banks' fiscal third quarter, but consumer loans — the segment expected to be hit the hardest — have so far remained stable.

Analysts have said it will take time for the impact of the prolonged decline in the price of crude to trickle down to the consumer segment, which includes credit card debt and car loans.

David Beattie, a senior vice-president at Moody's, says that although early indications of stress are likely to materialize, the fourth-quarter results will not show the full extent of the oil price shock on consumer loans in Western Canada.

The severity of the damage will depend on how much unemployment rises in oil-producing provinces says Beattie, the lead banking analyst at the bond credit rating business.

Beattie says the theme of aggressively slashing costs in order to drive earnings growth is also likely to emerge in the banks' earnings results.

One of the ways for banks to lower their overhead costs is through digitization, a process that can lead to layoffs as the banks replace paper processing.

Digitization requires an up front investment in technology but leads to cost savings down the road, says Beattie.

Several banks have made announcements to that tune over the past year, including Scotiabank (TSX:BNS), which plans to close a number of offices across the country over the next two years as it implements new technology to help with certain document processing functions.

The bank did not say how many roles will be impacted but noted that it will try to find new jobs for affected employees, wherever possible.

CIBC said at its investor day last month that it hopes to shave from its costs by 2019 by digitizing some of its processes, standardizing its data and re-evaluating its real estate portfolio.

The lender also announced it will take a restructuring charge of up to $200 million in the fourth quarter.

"They're getting to the point where they're really doing some substantive changes to the way they run their businesses," says Beattie.

"Digitization is doing that anyway, but the pressure of low interest rates and spread compression and low revenue growth is just making it all that more critical."

Also on HuffPost

Canada's Biggest Banks