With Budget Crunch Coming, Should Province Spin Off ATB?

Media Appearances, Taxation, Frontier Centre

Will the Redford government's "one-in-a-generation" budget include plans to spin off provincially owned ATB Financial?

That's what some players in the financial services industry have long wanted to see – arguing that the province shouldn't go head to head with the private sector when it comes to banking.

But if that's the government's intent, it's the best-kept secret in town. In the lead-up to Thursday's provincial budget, all the buzz has centred on possible spending cuts or tax hikes.

Asset sales? Not a peep. Although a sale or initial public offering of shares in ATB Financial could net the cash-squeezed provincial treasury billions of dollars, there's been almost no public debate about the idea, much less any hint that the Tories are actively considering it.

That's a shame. With Alberta facing a $6 billion hole in its non-renewable resource revenues, an estimated $4 billion deficit this year, and the province well-served by other financial institutions – notably homegrown players like Canadian Western Bank and Servus Credit Union – the notion at least deserves some scrutiny.

Respected energy industry investment banker George Gosbee, who sits on the board of Alberta Investment Management Corp. and is CEO of AltaCorp Capital, is one of the few senior executives to weigh in on the topic.

At a recent economic summit in Calgary, Gosbee told attendees the province could generate $4 billion by divesting Canada's only provincially owned bank, enough to erase the current year's expected shortfall.

Since Gosbee's financial advisory firm has a "strategic relationship" with ATB, it's surprising his comments didn't get more airtime.

But they were quickly drowned out by talk of a possible provincial sales tax – a non-starter for Premier Alison Redford's government – or hikes in personal or corporate taxes.

Although Gosbee's $4 billion estimate may be high, ATB is undoubtedly worth some serious coin.

With $33 billion of assets, it is the largest Alberta-based, deposit-taking institution in the province, serving more than 240 communities and 635,000 retail or corporate clients.

A recent study published by the Winnipeg-based Frontier Centre for Public Policy, a right-leaning think-tank, asserts that potential proceeds from a sale of ATB could be as high as $3 billion.

The 16-page study, prepared by Surrey, British Columbia-based financial analyst Ian Madsen, assesses ATB's value by using two different methodologies.

The first is a market-based analysis employing price/ earnings multiples and other common metrics used to value Canadian and U.S. bank stocks. On this basis, Madsen figures ATB is worth between $2 billion and $3 billion.

Second, Madsen uses discounted cash flow analysis to come up with an alternate estimate of ATB's value. Under this approach, he estimates the bank's present worth at between $1.45 billion and $2.96 billion. Both methods depend on a wide range of variables, of course, and the figures Madsen comes up with are only estimates, he admits. But since the ATB study is the first of its kind, it makes for illuminating reading.

Now in its 75th year, ATB was established during the dark days of the Great Depression in the 1930s, when the province's agriculture-based economy was on its knees and the big Toronto-based banks showed no interest in supporting the province's farmers or small businesses.

In view of its unique history and its strong ties to rural Alberta, it's no surprise that many Albertans retain a strong sense of loyalty to ATB. That, in turn, has allowed the bank to expand aggressively in recent years into areas like wealth management, where its assets have grown to more than $8 billion over the past decade or so.

As a Crown corporation, ATB has also enjoyed unique competitive advantages. Until fairly recently, it paid no corporate taxes – although it now makes annual payments to the province in lieu of tax. Meanwhile, the province's banking landscape has changed immensely. Alberta's emergence as Canada's energy superpower has driven the fastest-growing provincial economy in the country, along with population growth and highest average weekly incomes.

As a result, rival Edmonton-based financial institutions like Canadian Western Bank and Servus have become strong entities in their own right, eager to capitalize on the growth in their own home market.

Longtime CWB boss Larry Pollock, who is slated to retire as CEO Thursday after more than two decades at the helm, long dreamed of forming a major Alberta-based financial institution – possibly through a merger with ATB and Servus – that could compete on more even terms with Canada's Big Six banks.

Wouldn't it be uncanny if Pollock's final day on the job turns out to be the very day the province announces plans to divest ATB? Nah. That just couldn't be. Right?