National Bank CEO Louis Vachon defends position on oil patch

National Bank of Canada’s shift away from being the lender of choice to junior oil firms was an unpleasant procedure, but it’s provided the association with stability in the energy industry, its chief executive officer says.

In actuality, the Montreal-based bank’s energy-lending portfolio is growing {}, as bigger and better-financed manufacturers have sought new capital over the previous two quarters, even as oil prices have stalled below $50 (U.S.) a barrel, CEO Louis Vachon said.

National Bank’s repositioning in 2016 angered small-energy customers as they fought with the business downturn. Some were outspoken in their .

“We have been encouraging the patch for 35 years,” Mr. Vachon said in an interview. “We did transition from a few accounts, and they were definitely not content. But we are better positioned for the future, and I believe our franchise keeps growing{}”

“I don’t believe there was significant damage to the standing of the company.”

Faced with mounting loan losses and hazards of more default, National Bank took a {}250-million (Canadian) reduction provision for the business in 2016, a symptom of this commodity-price meltdown that disrupted the Western Canadian market. It reduced the amount of small manufacturers in its customer base to focus on companies that have the financial strength to help them withstand the oil-price slide.

Meanwhile, the financial institution hired new investment bankers and an equity research analyst to make a similar transition to bigger customers on the equity-financing and mergers- and- acquisitions end of the company.

Its losses in the business have totalled about $100-million over two decades. The move was a huge change for National Bank, which had a market as crucial creditor to oil patch startups and juniors, the positions of which have since been depleted. Energy remains one of its biggest lending segments.

Mr. Vachon said the industry’s main risks are rising production costs in the older western Canadian area, increasing environmental obligations as regulators tighten their principles and the effect of the shale revolution on commodity rates.

“For all those reasons, we would like to have more resilient balance sheets and they are inclined to be with larger manufacturers. We kept a number of the small, but by and large we are moving today to medium-size and larger-size manufacturers,” he said.

His prognosis is optimistic, despite predictions for crude costs that vary widely between $40 (U.S.) and $55 a barrel.

“If you are efficient and rewarding at these costs, then I think you’ve got long-term resiliency concerning your balance sheet. If we are wrong and it goes to $70 or $80, well, the people will go from earning money to earning plenty of cash, which is a fantastic thing.”

The bank believes it would have a major, long-term disturbance of manufacturing to push prices above $55 a barrel in the short term. Now, Mr. Vachon points out, even nations undergoing extreme political upheaval, such as Syria and Venezuela, keep producing petroleum.

Meanwhile, a change from fossil fuels to renewables is accelerating, but how fast society adopts new resources will depend on politics, technology, cost and other variables. Technology may in reality have slowed the transition, as it has reduced the cost of producing oil and gasoline in certain areas of the world, ” he said.

Uncertainty over how long the change will take is behind National Bank’s decision not to stop lending money for pipeline projects, Mr. Vachon said.

Fellow Quebec financial institution Desjardins Group has made headlines for its moratorium on loans to pipeline projects on ecological grounds. It has said it will decide this month whether to make it permanent.

“[The transition] will happen in an orderly manner over a time period. That’s how we are going to approach it,” Mr. Vachon said.

Courtesy: The Globe And Mail

Leave a Reply

Your email address will not be published. Required fields are marked *