Bank of Montreal CEO Sees Further Loan Losses If Oil Prices Drop

Bank of Montreal, Canada’s fourth-largest lender, will see further loan losses from oil-and-gas firms if energy prices remain low, Chief Executive Officer William Downe said.

“If oil prices stay down, we will have provisions for credit loss that we otherwise wouldn’t have,” Downe said Tuesday in a phone interview. “They’re not a good thing, but with respect to potential losses relative to the size of the bank or our total overall portfolio, they remain manageable.”

Oil-and-gas loans account for 2 percent of the Toronto-based lender’s portfolio, with more than half in investment grade and a significant portion not tied to energy producers, Downe, 63, said.

Bank of Montreal, which posted record profit Tuesday that topped analysts’ estimates, disclosed C$106 million ($79 million) in gross impaired loans in the oil-and-gas industry in the fiscal third quarter. That’s up from C$26 million in the second quarter and none in the first period.

“We see gathering credit storm clouds on the horizon,” Peter Routledge, an analyst with National Bank Financial, said in a note to clients. “As, and if, low oil prices persist through fiscal 2016, we expect oil-and-gas impaired loan formations to increase materially in both Canada and the United States.”

Crude Plunges

Crude oil plunged below $40 a barrel for the first time in more than six years on Aug. 21 amid signs the glut will be prolonged. Prices have fallen 36 percent since this year’s peak in June, and the U.S. benchmark settled at $39.31 in New York.

Oil’s abrupt decline may be what’s needed to get energy producers to rein in costs, Downe said. Such cycles are part of a “normalization process” and costs will come back in line for those energy producers, Downe said.

“They’ll have indigestion and clearly there’ll be some reclassified loans and perhaps some provisions,” Downe said. “But it’s constructive to look at cost cycles, where through work-out and adjustment the ultimate losses have been very low.”

Stress tests using $35-a-barrel oil prices for the next 12 months and $50-a-barrel for 12 months after that showed “a small increase” in total loan losses, Chief Risk Officer Surjit Rajpal said on a call with analysts.

Bank of Montreal shares gained 2.4 percent to C$67.82 at 4 p.m. in Toronto, paring this year’s decline to 17 percent. The stock is the second-worst performer in the eight-company Standard & Poor’s/TSX Commercial Banks Index, which has slid 12 percent in 2015.