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Canadian banks could see their forecast earnings decline if the oil downturn spills over into the wider economy.

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Price drop to $22.50 that traders described as ‘horrible’ means more companies will struggle to cover the cost of production

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Oil and gas companies defaulting on their loans could shave off as much as 4.3 per cent of estimated earnings at major Canadian banks next year, according to a stress-test report by the Canadian Imperial Bank of Commerce.

Combined with possible contagion effect on non-oil Western Canadian companies and defaults in Alberta’s housing market and retail loans, banks could rack up earnings declines of as much as 8.6 per cent in 2016, CIBC estimated.

“We conclude that while the oil price does not strongly affect default rates in the energy sector in any given year, a prolonged significant drop in the price of oil, combined with weaker economic activity, will be a driver of higher default rates,” CIBC analyst Robert Sedran wrote in a report this week.