How Alberta's bank rode out the oil price crash
There was nowhere to run for ATB Financial as the economy nose-dived
For those living in Alberta, the oil market crash was an unavoidable tragedy. With every passing day, oil prices would fall, oilpatch company losses piled up, and more Albertans were out of work. People felt helpless as the economy turned sour.
The oil plunge posed a significant threat to ATB Financial. Most banks are diversified geographically, but ATB only operates in Alberta, so there was nowhere to run from the downturn. The Crown corporation, owned by the Alberta government, had to figure out how to stay afloat, while also sticking its neck out for the oilpatch.
ATB is supposed to keep offering credit when times are bad, which is part of the bank's mandate dating back to its creation during the Great Depression when other banks stopped lending in the province.
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The oil price crash began in mid-2014, when oil in North America was trading above $100 US per barrel, but within six months it was below $50 US and eventually bottomed out below $30 US.
This downturn wouldn't be over quickly and the recovery wouldn't be fast, either. The unemployment rate would hit nine per cent in the province with tens of thousands of people losing their jobs.
"We were grieving with the rest of the province as things went down," said Dave Mowat, outgoing CEO of ATB Financial.
During a CBC News editorial board meeting, Mowat detailed how the bank weathered the financial storm when financial optimism was hard to find in the province.
Fiscal pain
ATB's exposure to the downturn was considerable. In 2015, its provision for loan losses increased by 500 per cent and, in one quarter alone, wrote off $30 million in bad loans to oil and gas companies. Still, it kept lending. In the last quarter of that year, ATB increased its loans to small and medium-sized businesses by nearly 30 per cent.
At one point in 2015, it had $37 billion outstanding in loans, compared to $30 billion in deposits. The Alberta government increased the size of ATB's credit line by $1.5 billion so that it wouldn't have to pull back on lending.
"It was important to us because it gave us liquidity at a very important time," said Mowat. "It gave us more ability to borrow in the markets."
Credit agencies were keeping a close watch on the provincial government's finances, but also a close eye on the situation at ATB. The bank's loan book was dragging on the province's credit rating, according to Moody's Investor Services.
"Our loan-losses rose considerably, but we never felt the organization was at risk," said Mowat.
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January 2016 was the low point in Alberta as prices reached their bottom. Energy companies were struggling to even cover head office expenses, let alone even think of turning a profit.
Patience with the 'patch
Mowat said companies had to act quickly, while it was vital that bankers had to have patience.
"In previous downturns, banks — we created our own problems," said Mowat. "If you panic and start selling drilling rigs and half the drilling rigs are for sale, then drilling rigs aren't worth anything and then you look at your accounts and 'my drilling rigs aren't worth anything, I don't have any security.' So you get this swirling action going on."
The oil and gas companies with management teams that ATB believed in, Mowat said they were given "a longer rope" to show signs of a turnaround. Broadly, the bank wanted to see companies slash expenses and not necessarily hold on to employees in hopes a quick recovery in commodity prices.
"You have to get your costs down," said Mowat. "If you don't lay people off and wait too long — you go broke."
The oilpatch players feeling the financial heat began selling assets to shore up their balance sheets.
The bank's strategy seems to have paid off.
With oil at one point trading under $30 US, not everyone was able to hold on and several oil and gas companies entered bankruptcy protection, although fewer fell victim than many expected.
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Diversified customers
ATB's customers are all in Alberta, but within the provincial boundaries there is a level of diversification because of how different regions faired during the downturn.
For instance, Edmonton performed better than Calgary as the capital city's unemployment rate was more than three per cent lower in late-2016 than its southern neighbour.
The housing market also varied across the province since the oilpatch is concentrated in certain pockets, while communities like Banff and Canmore were largely not impacted.
As oil prices tanked, ATB officials closely tracked its mortgages compared to housing prices to check if the mortgage portfolio was ever underwater.
"We never even got close. Fort McMurray, maybe because the [wildfire] exacerbated things there," said Mowat.
Even now as the economy grows, fortunes are mixed in Alberta as businesses in places like Grande Prairie can't find workers, while in the southeast corner, people are competing for openings.
"We're seeing slow and steady growth," said Mowat. "It's not homogeneous."
Plenty of wealth
The other important factor in ATB's ability to overcome the downturn is the fact Alberta is a historically lucrative and prosperous province. In 2014, the average weekly wage in the province was $1,163, which was 23 per cent higher than the national average. At the time, the median household income in the province was close to $100,000.
With so much money circulating the province for so many years, most Albertans were able to endure a period of belt-tightening. ATB was no different.
"Alberta is a pretty rich place," said Mowat. "People have cash reserves."
Wages fell during the recession, but even now, Alberta leads the country in wages and wage growth.
"People have lots of equity in their homes. We're not like the United States where you can buy a house for nothing down," said Mowat.
With the recession now in the rear-view mirror, ATB is flourishing again as the province's fortunes swell. The bank is posting record-breaking profit and issued the highest ever number of loans last year.
Everyday the bank sees the Alberta economy growing.
"The deposits are a little bit bigger and people are working a little bit more," said Mowat.
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