Big 6 banks see profits rise to $10.4B, helped by oil's rebound

Earlier this year, someanalysts were expecting that the country's big banks would see their profits squeezed by delinquentoilpatch loans. And while the banks have incurred some energy losses, they weren't enough to prevent all six from posting higher profits in the third quarter.

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Total profits of Canada's big six banks came to $10.37 billion in the quarter, which ended in July. That's up 12.6 per cent over last year's Q3 profit figure of $9.21 billion.

Figures from Bloombergshow that the big banks collectively set aside $1.99 billion for bad loans in the May-to-July quarter lower than what analysts had been expecting.

Scotiabank, for instance,loweredits third-quarter provision for credit losses by $181 million to $571 million, suggesting itthinks the worst of the energy downturnis in the rearview mirror.

"We have been consistent in stating that [energy sector] losses will be manageable and we are confident that losses in this sector have peaked," Scotiabank CEO Brian Porter said during a conference call with analysts.

Oil's rebound from $26 US a barrel in mid-February to the current level of about $45 US has helped energy companies pay their bills and boosted most of the banks' confidence that the worst is over.

Only one of the big banks Bank of Montreal raised its loan loss provisions.

Housing marketfocus

Bank loans to the energy sector which Bloombergsays account for two per cent of the banks' total loan portfolio are dwarfed by the amount they loan inmortgages.

So it's not surprising thatthe main focusof analysts grilling bank executivesduring the earnings calls in the last week was about the health of their mortgage portfolios in case of a major housing downturn.

"It seems like analysts have pivoted now more to being concerned about exposure to real estate," Edward Jones financial services analyst Jim Shanahan told the Canadian Press.

"That's likely to be the focus for the balance of theyear."

The worry is what would happen in the event of a majorhousing market crash especially in the pricey markets of Vancouver and Toronto.

'Credit profiles are strong'

Scotiabank, Royal Bank and CIBCbrass all took pains to assure the analysts that their residential mortgage loan accounts are ofgoodquality.

"Overall, we remain comfortable with our exposure to the Canadian housing market,"RBC chief risk officer Mark Hughes told analysts last week. "Our clients' credit profiles are strong and have remained stable."

A large percentage of the residential mortgages heldby the banks isalso insured. Thatprotects the banks if homeowners can't make their mortgage payments. Mortgage credit insurance is required whenever a homebuyerputs less than 20 per cent down.

The largest insurer of residential mortgages, the Canada Mortgage and Housing Corporation, reportedthis week that delinquencies were rising in Alberta and Saskatchewan, but said mortgage arrears remained low and its homeowner clients have an average credit score of 750, considered very good.