Newspaper article The Canadian Press

Oil Price to Hurt Lenders' Investment Banking Profits during the First Quarter

Newspaper article The Canadian Press

Oil Price to Hurt Lenders' Investment Banking Profits during the First Quarter

Article excerpt

Oil price to hurt profits at Canadian banks

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TORONTO - Canada's top lenders are expected to report a decline in their investment banking profits when they release their first quarter financial results this week, largely due to a slowdown in oilpatch business.

Oil and gas companies are major clients when it comes to investment and corporate banking services, enlisting banks to help them generate cash for new projects by issuing stocks or debt on the public markets. It's a lucrative division that contributes up to 20 per cent of the bank earnings.

But the recent plunge in the price of oil has dragged down energy sector spending with it, reducing the need to raise capital on the markets.

"We do expect that the advisory fees that were contributed by energy previously are going to drop to fairly close to zero," said Barclays analyst John Aiken.

James Shanahan, an analyst with Edward Jones, says investment banking generates higher profit margins than other lines of business.

It is also the segment that is likely to show the first signs of weakness due to the drastic decline in the price of oil, which has been hovering at US$50 in recent weeks -- a sharp drop from last summer when it traded for about $100 a barrel.

Analysts are also concerned about the impact on the banks' loan books if oil and gas companies get into financial trouble or oilsand workers lose their jobs and begin defaulting on their mortgage payments.

But analysts do not expect credit issues to begin surfacing until late this year.

"We don't expect to see the credit implications, if any, until late in 2015, early 2016," Aiken said.

The impact of oil prices on banks' bottom lines will be among the key issues for analysts and investors as the lenders report their first-quarter results.

The Bank of Montreal (TSX:BMO) will lead the group, releasing its earnings report on Tuesday. …

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