GRAPHIC-Decupling of energy reserves of Canadian banks to limit future pain, according to investors

TORONTO, June 1 (Reuters) – Canadian banks’ exposure to the besieged energy sector contributed to the drop in second quarter profits, but investors said as oil prices recover, the Ten-fold increase in loan loss allowances by lenders over the past year may be enough to absorb any losses.

Even as write-downs on banks’ energy loan portfolios have skyrocketed, outpacing soured commercial lending growth overall, Canada’s largest banks have been increasing their lending to the oil and gas sector at a faster rate than to other industries.

Meanwhile, funds set aside to cover losses on energy loans reached C $ 450 million ($ 330.37 million) at Canada’s four largest banks, from $ 46 million a year earlier. according to Reuters calculations. This compares to a tripling of provisions for total commercial loans.

Energy loans are the riskiest part of banks’ portfolios, but “a lot of provisions have been made … and I think that will probably be enough,” said Brian Madden, portfolio manager at Goodreid Investment Counsel. “The wild card, of course, is if (oil prices) go back to zero.”

U.S. crude futures rebounded from an April low of minus $ 40.32 to $ 35.90 on Monday.

The recovery in oil prices “is as V-shaped as you’re going to get it… I have to believe the last quarter was probably the worst we’re going to see,” said Allan Small, Senior Investment Advisor at Allan Small Financial group with HollisWealth.

Not all market watchers share this sentiment. Edward Jones analyst James Shanahan pointed out that downgraded energy lending is currently at half of the level seen during the 2016 oil price collapse, relative to total energy lending, and could drop to this rate.

Despite the recovery in energy prices, they are hardly above the low of $ 26.05 observed in 2016.

Reporting by Nichola Saminather in Toronto; Additional reporting by Noor Zainab Hussein in Bangalore; Editing by David Gregorio

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