RBC shareholders voice concern over oil and gas loan exposure

Shareholders of Royal Bank of Canada (RBC) are concerned over the bank’s exposure to oil and gas following an increase in bad loans for 1Q16. As we have previously noted, RBC is one of the largest lenders to oil and gas companies in Canada and has a large consumer loan book in the oil producing area of Alberta, which has been impacted by thousands of job losses. In February, the bank warned that impaired loans to oil and gas firms had almost doubled from the previous quarter; shareholders are concerned this could worsen over the remainder of 2016.

Royal Bank of Canada, Canada's biggest lender, faces shareholders at its annual meeting in Montreal on April 6 amid concerns over its oil and gas exposure following an increase in bad loans in the first quarter.

RBC is one of the biggest lenders to oil and gas firms in Canada and has a sizeable consumer loan book in the oil-producing province of Alberta, which has been hit by thousands of job losses.

The bank said in February that impaired loans to companies in the oil and gas sector had almost doubled from the previous quarter to CA$310 million, and it had set aside CA$106 million to cover bad loans to the energy sector.

That warning, along with increased provisions by other lenders, raised concerns the impact on Canadian banks could worsen in the remainder of the year.

"The longer we go with these low oil prices the more pressure is going to come on the banks, so it's going to get worse. I think it's going to have some impact on earnings, especially for RBC, which has a big chunk of its business in capital markets," Dan Werner, an analyst at Morningstar, said.

Canada's banking regulator said last month that the country's biggest banks needed to review their accounting practices to ensure they have sufficient reserves to withstand the impact of the commodity-price collapse on the economy.

As well as direct loans to oil and gas firms, Canadian banks are affected by secondary exposure to consumers with credit cards and home loans whose personal circumstances could have been impacted. Edward Jones analyst Jim Shanahan said he believed that was a bigger concern for RBC than direct exposure.

"RBC has a fair bit of exposure to residential mortgage loans in Alberta and the Prairies. We're a little bit more concerned about uninsured mortgages and uninsured home equity loans," he said.

RBC's capital strength weakened following its US$5 billion acquisition of Los Angeles-based City National Corp. in November, which reduced its core Tier 1 ratio by 70 basis points to 9.9%. However, analysts do not expect it will need to raise capital in the foreseeable future.

Another headache for RBC's management was the bank being named in leaked documents from a Panama law firm that appear to show some of the firm's clients evaded tax and laundered money. RBC said on April 4 that it had controls in place to prevent illegal activities.