Bank of Montreal said bad loans to oil and gas companies more than doubled in the latest quarter of 2016, and it set aside more funds to cover losses, setting the scene for expected increases in provisions by other Canadian lenders.
Canada's fourth-largest bank said May 25 that gross impaired loans to the oil and gas sector rose to US$312.67 million during the second-quarter ended on April 30, while provisions for credit losses increased to US$153.5 million.
Canada's other major banks are also expected to set aside more funds to cover bad loans when they report quarterly results over the coming week.
Although oil prices have improved since February, analysts expect the financial reports to show the impact of tighter credit lines to energy companies to reflect lower oil prices, a trend that could lead some borrowers to default.
National Bank analyst Peter Routledge said BMO's increased provision was not a surprise.
"We expected that across the sector," he said. "What we saw in terms of new provisions for loan losses in the oil and gas portfolio were pretty consistent with that."
Energy sector loans accounted for 2% of BMO's total credit portfolio, and the oil-producing province of Alberta makes up about 6% of its loan book.
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