The ATB Advantage

December 8th, 2008
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As the world’s banks rush into the arms of governments, ATB Financial appears fortunate that it never left

Governments worldwide are moving towards nationalizing their banks. Isn’t it cool to know that here in free-wheeling, laissez-faire Alberta, we’ve had bank socialism for 70 years? I’m talking about the Alberta Treasury Branches (younger folk will know it as the modernized ATB Financial) – provincially owned, provincially guaranteed and, until relatively recently, politically directed. For decades it operated free of everyday banking worries like lending ratios and even capital. It had no equity, no net cash, no value. In ordinary English, it was insolvent. The ATB just motored along, a bundle of paradoxes. Yet these have turned out to be remarkably happy paradoxes.

The purely regional focus that seemed the ATB’s Achilles’ heel has become its great strength. Small size and lack of diversification historically were the bane of the American banking system, with hundreds of bank failures and hundreds of billions in losses. Here in Canada, the Northland and Canadian Commercial banks cratered in the mid-1980s largely as a result of overexposure to the small, weak Prairie market and its cyclical, commodity-based economy. Others, like Alberta’s Principal Group, morphed into a complexity and opacity beyond the ken of regulators, creating costly fiascos.

The subsequent growth of the Canadian Western Bank, the Western Financial Group and several large credit unions, however, proved that regional financial institutions can work. True, they’re playing at a far richer table today than the drought-ridden, destitute and desperate Alberta of 1938, when oddball Social Credit visionary William “Bible Bill” Aberhart founded the ATB to rescue prairie farmers from foreclosure by eastern banks. Today’s Alberta would be virtually unrecognizable: quadruple the population, vastly more diversified, the nation’s economic powerhouse, with a sophisticated capital market and companies drawing investment from around the globe.
Those are advantages not of the ATB’s making. But evolving beyond its bad, old days of the 1980s and ’90s was. Fifteen years ago the ATB was racked by bitter fights with Peter Pocklington and Edmonton’s mall-owning Ghermezian family, shoddy lending and accounting practices, a massive book of bad loans, an accumulated deficit giving it a financial value of less than zero, political interference and, yes, outright criminality among some middle managers. It was spitefully known as the outfit “where bad loans go to die” and as unemployment insurance for worse-than-mediocre managers.
The ATB’s escape from these pitfalls scaled a mathematical unlikelihood so steep it almost makes you believe in Providence. Thanks to some superb business management and more enlightened political oversight, today’s ATB is well-run, using sound banking principles, plus consistently profitable. Instead of looting the ATB’s profits, the province has allowed it to retain earnings and build up capital. Its equity had grown to $1.7 billion on assets of $24.5 billion at June 30, 2008 – a higher ratio than the Royal Bank, and far more solid footing than dozens of crumbling international financial institutions.
The ATB did build up exposure of over $1 billion in asset backed commercial paper (ABCP), most of it of the riskier, non-bank-sponsored variety. It had to step in and rescue its investment arm, which held a lot of ABCP. In its fiscal year ended March 31, 2008, the ATB took a charge of $253 million, virtually wiping out the year’s profit. It’s a measure of the ATB’s progress that what would have been a calamity 20 years ago is a mere annoyance. Only time will tell whether the floating-rate notes the ABCPs are being rolled into will perform or whether there’ll be further writedowns.

Five years ago there was serious talk of privatizing the ATB, perhaps merging it with the Canadian Western Bank. These days that’s downright crazy talk, what with disintegrating banks rushing into the arms of governments everywhere. What could be better than being both guaranteed and owned by a petro province (even at US$65 per barrel oil)? Scanning its financials, reading its business plan and knowing the economy that is its lending playground, I’d say the ATB is on firm ground.

The chances of privatization today seem about zero. And in spite of the obvious ideological conflicts, I’d guess most Albertans want it that way

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By George Koch