Canada's biggest banks earn up to 20 per cent of their revenues through providing investment and corporate banking services, with oil and gas companies an important part of that client base.
But oil prices have tumbled roughly 35 per cent to under $70 a barrel from their mid-summer highs due to a strong U.S. dollar, low demand and a glut of global supply, and now TD Bank says it will have to look beyond the oilpatch to make up its investment banking revenue.
"With the current activity going on in oil pricing, it certainly is impacting activity levels in the business," Bob Dorrance, the head of TD's wholesale banking division, told investors during a conference call earlier this week after the bank reported its fourth quarter results.
"Things have slowed down."
Scotiabank was the last of Canada's five big banks to report its quarterly earnings this week, wrapping up a series of conference calls that were peppered with talk about falling oil prices.
Energy sector dragging down stocksThe energy sector — a major weight on the Toronto Stock Exchange — has taken a beating on the markets and has taken other stocks, including those with indirect exposure to companies that produce crude, down with it.
While all of the country's top lenders reported substantial profits during the quarter, Canaccord Genuity analyst Gabriel Deschaine noted that lacklustre performance on the stock markets caused many of the banks to report weaker than expected revenues from their brokerage businesses.
Scotia Capital analyst Sumit Malhotra says roughly 30 per cent of the underwriting fees — fees from administering new issues on the stock markets — earned by Canada's six top banks this year came from the energy sector.
A drop in commodity prices could make resource companies less likely to make a public offering on the market, said Malhotra, pointing to Teine Energy as an example.
The Canadian oil and gas producer had been planning an initial public offering but a Bloomberg News report in October said the company delayed the debut due to the decline in oil prices.
"While we do not want to be too alarmist in this regard, it should be clear that the capital markets operations of the banks have played a key role in driving revenue and earnings growth for the Canadian banking sector in 2014, and any sustained period of weakness in the energy sector would be detrimental to activity levels going forward," Malhotra wrote in a note to clients.