The collapse in crude oil prices late in 2014 sent shockwaves around the world and, for Canada’s banks, those waves crashed onto their income statements this year.

Each of the big banks, of course, lends to companies that produce oil and gas, or that sell goods and services to producers. And when the price of a barrel of crude oil fell from US$110 to US$26, it became inevitable that some of those borrowers would not be able to repay their debts.

During 2016, we have seen huge increases in gross impaired loans and provisions for credit losses specific to the energy sector. And this has eaten away at the banks’ fabled ability to keep profits moving up in good times and bad.

But the most recent set of earnings has shown the worst may be over.  If so, the banks may soon benefit from a so-called “tailwind” to their profit growth later this year and next.  Every dollar not set aside in a provision for credit losses is a dollar that goes right to the bottom line.

Let’s take a look at what we’ve seen so far.

Four of the big six banks have reported and the trend has been for gross impaired loans to oil and gas borrowers to have either declined, or to have risen much more modestly than earlier this year.  Provisions for credit losses fell at three of the four banks and in some cases almost evaporated entirely.

A loan is defined as “impaired” when bank management believes there is no longer a reasonable chance of it being repaid in full.  And “provisions” are taken to account for money expected to be soon lost on bad loans.

Bank of Montreal reported $421 million in gross impaired loans to the sector in this most recent quarter, the fiscal third quarter.  That’s a big number – much larger than BMO’s impaired loans to any other industry – but only $21M larger than the energy impairment three months earlier, in the second quarter.

By contrast, BMO’s second-quarter gross impaired loans to the sector were up by $259 million from the first quarter.  And the first quarter number was $61 million greater than the figure for the fourth quarter of 2015.

For some banks, the pain is already shrinking.  Canadian Imperial Bank of Commerce reported gross impaired loans to energy customers at $409 million in the third quarter. That was $299 million less than the number reported in the second quarter.

And CIBC’s provisions for credit losses to energy borrowers almost disappeared, standing at just $2 million.  The number was only $8 million at Toronto-Dominion Bank.

So, is the worst indeed almost over?  It may well be.  One quarter doesn’t make a trend, but the dramatic slowdown in rising impaired loans suggests further declines in provisions soon.

One wildcard is the price of crude oil.  If it nosedives to US$26 again, all bets are off.

But before this most recent set of earnings releases began, CIBC Capital Markets analyst Robert Sedran said oil-related losses were likely reaching a peak.  

“We think that time is approaching,” he wrote on Aug. 9.

“Though our forecast calls for elevated loan losses into fiscal 2017, we are beginning to wonder if a majority of the pain will be felt in fiscal 2016.”