Banks testing loan strength at $25 oil

Canadian banks are taking a closer look at their loan books in light of continued declines in the price of crude, with one bank stress-testing its oil and gas sector portfolio to see how it would perform if the commodity dips as low as US$25 a barrel.

“You’ve got to ask yourself, how low could it go?” Bank of Montreal’s chief executive Bill Downe said as he laid out the bank’s stress test scenarios during a conference of bank CEOs in Toronto on Tuesday.

Banks use stress tests, which are computer-generated simulations, to gauge how certain hypothetical economic events might impact their businesses.

Although it is studying the worst-case scenario of $25 a barrel oil, overall, BMO’s stress tests assume an average price of $35 a barrel over the course of the year.

“I recognize that today the price of WTI is below that, but I think that’s a reasonable price and assumption,” said Downe, as crude oil futures were trading close to US$30 a barrel.

For 2017 the bank (TSX:BMO) is using $30 a barrel oil for its stress tests, and for 2018 it’s considering the potential effects of a $40 a barrel scenario.

Meanwhile, Royal Bank (TSX:RY) CEO Dave McKay said he expects oil to start moving back towards the $50 a barrel range — and maybe slightly above — over the next 18 months.

“It’s a little softer than anybody predicted right now,” McKay said.

CIBC (TSX:CM) chief executive Victor Dodig said the bank’s stress testing has shown that if the price of oil remains at $30 for three years, the bank will see cumulative loan losses of $650 million.