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Nov 27, 2018

Scotiabank 'confident' its big energy portfolio can weather oil slump

A 'mystery' that Scotia doesn't have major operations in the U.S.: Money manager


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Bank of Nova Scotia, the biggest Canadian lender to oil and gas companies, has been reducing risk in its portfolio and doesn’t expect a major fall out from slumping prices.

“We feel very proud of the names that we bank," Dieter Jentsch, the executive who’s overseen much of the lending to Western Canada’s energy firms in the past three years, said Tuesday on a conference call with analysts. “I’m confident this will withstand a period of unsettlement in the commodities market."

Scotiabank’s energy loans accounted for $14.8 billion, or 2.6 per cent of its loan book in the fourth quarter, according to financial disclosures. Of that, $3.4 billion was tied to Canadian exploration and production, including $1.2 billion directly linked to Western Canada Select oil. Bank of Nova Scotia and Bank of Montreal have the highest direct exposure to oil and gas among Canadian lenders, according to a report last week by RBC Capital Markets.

Heavy Canadian crude has been declining since mid-May, with prices plummeting by more than 60 per cent amid a lack of pipelines and glut of supply. The result has been the worst pricing environment in the history of Canada’s oil industry, which accounts for about 10 per cent of the nation’s economy and a fifth of exports.

Western Canada Select, the main blend sold by Canada’s oil sands, this month sunk to its lowest level since Bloomberg started tracking the data in 2008. The discount to U.S. benchmark crude widened to as much as US$52.40 a barrel in October, also a record. The gap has since narrowed to about US$33.

Scotiabank’s energy borrowers have a "disciplined view of capital deployment" and balance sheets have "never been as strong." Management teams are “very cost-conscious and very revenue efficient," said Jentsch, Scotiabank’s head of global banking and markets. Scotiabank has also spent the past few years focusing more on those energy firms with the strength to handle downturns.

"Even since 2015 and 2016, we’ve up-tiered our companies we deal with and our counterparties," Jentsch said on the call.