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“In our severe stress scenario, however,” he warned, “some of the banks’ CET1 (capital) ratios could fall under 9.5 per cent, in which case we believe they might be required to take capital conservation measures, cut dividends, or raise additional equity.”

In an interview, Beattie characterized the likelihood of the severe stress case as “very remote” and said dividend cuts would be avoided by the big banks “except under extreme duress.”

Still, with oil prices slumping to levels not seen in more than a decade, the ratings agency expects banks will have to absorb the pain of oil producers, drillers, and service companies, as well as consumers in oil-producing provinces.

In the severe stress test scenario outlined by Moody’s, losses in the big banks’ consumer portfolios would rise above the historical peak, and there would be a 20 per cent decline in capital markets’ net income, driving losses to 1.5 times quarterly net income.

In this scenario, unless the banks reduce the payout ratio — the percentage of earnings paid out to shareholders as dividends — or issued shares, “it would take multiple quarters to absorb stress losses through retained earnings,” Beattie wrote.

Among Canada’s biggest banks, Canadian Imperial Bank of Commerce and Bank of Nova Scotia emerge as the “negative outliers” in the Moody’s stress testing.

CIBC’s rank reflects the fact that the bank’s operations are primarily in Canada. The country’s fifth-largest bank also has “considerable oil and gas concentration in its corporate loan book, and a material portion of its earnings comes from capital markets activities,” Beattie wrote.