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Canada’s big banks have long been seen as rock-solid investments during times of market turmoil. But one award-winning fund manager says their ubiquitous reputation for stability has lulled many into ignoring growing risks posed by continued weakness in the energy sector.
“Everyone believes they are safe because they heard they are safe. I was a bank analyst for three or four years. I can tell you they are not all they are cracked up to be in terms of their reputation,” said Dan Dupont, a portfolio manager at Fidelity Investments.
Do you think Canadian banks are a safe investment? https://t.co/lOMbxReh3b— BusinessNewsNetwork (@BNN) February 3, 2016
Dupont manages the $4.38 billion Fidelity Canadian Large Cap Fund. He warns the prospect of oil and gas companies defaulting on their loans could have a major impact on the share prices of Canada’s banks.
“Oil and gas loan portfolios are somewhere around three or four percent of some of the bank’s loan books. You have to multiply that by a factor of 10 to 15 in terms of bringing it up to the equity level. Oil and gas loan books are really 30, 40, and 50 percent of the banks’ equity value,” he said.
Bank executives said their energy exposure was limited as they reported profit growth of six percent on average last year in the face of sinking oil prices.
Dupont says that’s mainly because they’ve have been riding high at the top of the credit cycle, benefiting from a robust real estate market and strong corporate lending. When the credit cycle turns negative, he says there is no telling how quickly that will translate to earnings.
“We’re just starting to see some of those cracks,” he said. “It’s very difficult to know how much downside there is.”