As has now become the customary, on 19 November ATB quietly released its second quarter financial statement.
Postmedia and The Globe and Mail did not report the rather surprising profit turnaround at the publicly-owned financial institution. The provincial agency’s news release entitled “Helping Albertans move forward” speaks of the assistance ATB has given many of its borrowers, courtesy of a mandate of the Kenney government. According to the release ATB has “reached out” to an unspecified “thousands of consumer and business customers who participated in our relief program to draw up personalized plans supporting their financial future.” Consistent with government efforts to attract investment and diversify the Alberta economy, the release states: ATB is helping Alberta’s business owners “pivot, diversify and adapt to ever-changing economic conditions while investing in our province and supporting customers with new and renewed loans of $4.6 billion.”
A specific number was given on the number of business customers taking advantage of the federal Canada Emergency Business Account – 17,500 ensuring $700 million in funding for “micro and small business.” However, there was no data on the number of non-business customers taking advantage of the ATB loan deferral program costing $250 million. This initiative of the provincial government is part of the government’s Economic Recovery Plan. It is unclear that the provincial government will be offsetting any costs associated with this ATB/government program.
According to the release ATB “delivered solid operating revenue of $428.4 million and significantly improved its efficiency with expenses at a two-year low. Operating revenue over the six months has stayed the same as the period in 2019. Other positive highlights included ATB’s newly minted Wealth arm which grew investments under administration to $22.5 billion. Another positive was the provision for loan losses decreasing by almost $200 million, coming in at $52.2 million. This was the most important factor in ATB turning a first quarter $114 million loss to a $90 million profit of in the current period.
Picking up common messages from their UCP “shareholder,” President Curtis Stange said “Alberta’s adaptability and resilience are critically important. At ATB, we’re working with Albertans—from supporting innovation in our agriculture, technology and energy sectors to improving mental wellness—so our province can thrive once again.”
Second Quarter Financial Results
While the press release would suggest that matters are moving along satisfactorily at ATB, even with financial pressures on families and businesses, the financial results are remarkably devoid of red ink. The agency’s productivity or efficiency ratio improved significantly from 71.2 per cent to 66.7 per cent
. 
Credit Quality
The most surprising factor in ATB’s profitability, whose mention was absent in the news release, was a significant improvement in the provision for credit losses. Looking under the hood however conveys a slightly different message. A provision for credit loss is a charge that the institution takes against its income statement- thereby reducing profitability. The provision is calculated based on ATB’s assessment of the probability of loss. Its formulation is based on a variety of factors many of which are subjective in nature and which rely on the judgments of management and overseen by the Credit Risk Committee of the Board and ultimately the board of directors itself.
Relevant forward-looking economic information is incorporated for each loan portfolio when measuring expected credit losses, based on a
five-year outlook considering a combination of past, current, and future economic conditions and outlooks.
While there is an elevated level of measurement uncertainty in the COVID-19 environment, there are detailed policies and internal controls i n
place to ensure these judgments and estimates are controlled, reviewed, and consistently applied.
ATB management prepares three economic scenarios- baseline, optimistic and pessimistic-which project the unemployment rate, housing starts, the oil price, and the Canada/U.S. exchange rate for 2020-22. These four factors are seen by ATB management, based on statistical analysis to be the most important macro-economic factors in predicting actual loan losses. The scenarios (p. 26) are adjusted quarterly and ATB’s statements shows the assumptions used in September 2020 and March 2020.
The unemployment rate scenarios in September are more negative than March while housing starts (a pleasant surprise across Canada) are more optimistic. Oil prices are somewhat more optimistic and the exchange rates scenarios in September are more positive for the Canadian dollar.
Credit quality is quantified using three buckets – Performing (Stage 1 and 2) and Impaired (Stage 3) and then is diced into five categories moving from very low risk to impaired. This is further broken down by borrowing types (e.g. mortgage loans, personal loans, business loans). Movements between stages indicate a trend towards better credit (Stage 3 to stage 2) or worse credit (Stage 2 to Stage 3).
Each category of loans has a potential of 15 cells to populate. Risk analysts examine the migration from low risk to high risk to determine trends. This is very useful information for ATB but more is needed. We still do not know what the provisions for credit losses are by industry sector e.g. energy, commercial real estate, and hospitality – hotels and restaurants.
Parsing this information on the business loan portfolio we can say that firstly- the amount of business loans at ATB has gone down, not up – to assist business. Secondly, the amount of very low risk loans and low risk business loans have fallen significantly. High risk loans and impaired loans have increased over the six months. On the other hand, high risk and impaired business loans grew by over $270 million over the six month period.
| Level of Risk | Sept 30 2020 | 31-Mar-20 | Difference |
| Very l ow risk | 3,621,369 | 4,122,330 | -500,961 |
| Low risk | 13,199,092 | 14,422,471 | -1,223,379 |
| Medium risk | 4,598,241 | 4,423,404 | 174,837 |
| High risk | 684,988 | 432,193 | 252,795 |
| Not rated | 39,583 | 32,335 | 7,248 |
| Impaired | 977,703 | 937,249 | 40,454 |
| Total Business Loans | 23,120,976 | 24,369,982 | -1,249,006 |
| Source: ATB Financial statements for quarter ended 30 September 2020, p. 24 | |||
The forgoing table suggests that ATB’s loan quality is actually deteriorating with more loans migrating to the higher risk categories while the low risk category is getting smaller. How this syncs with lower loan loss provisions is not clear.
In the case of the Allowance for Credit Losses- a balance sheet number- the balance for business loans fell by about $12 million from the end of June to the end of September. The allowance fell by $7 million for residential mortgages, $13 million for personal loans and about $2 million for credit card loans. The Allowance is a reserve or cushion set aside against which actual losses when they are known can be offset. Under capital adequacy rules a portion of the collective allowance for loan losses is counted as Tier 2 or secondary capital. In the case of ATB, this number is $319 million.
Reality Check
For the struggling small business sector the Alberta economic environment is comparatively worst than in other provinces according to October survey data by the Canadian Federation of Independent Business. To the question as to “whether revenue is normal or better,” only 21 per cent of Alberta businesses agreed, the lowest in the country. To the question “Our business has seen a further drop in sales as a result/fear of the “second wave” Alberta was the third worse province (53 per cent) after Ontario and Manitoba (56 per cent.) To the question “Right now, our business is losing money for every day that it is open,” Alberta leads the nation at 45 per cent. Significantly the worst affected sector is hospitality where 60 per cent of Alberta respondents in that sector confirmed they were losing money.
A reader of financial statements of ATB would not know how much the Alberta taxpayer-owned institution has loaned to the hospitality sector except it is less than the $4.2 billion loaned out to the agriculture and forestry sector. ATB only reports its three highest sectoral loan concentrations.
To the question: “We are actively considering bankruptcy/winding down our business as a result of COVID-19” Alberta stands at 16 per cent just below Saskatchewan’s 18 per cent. Nationally 14 per cent of CFIB respondents answered they either strongly or somewhat agreed to the question “I am actively considering bankruptcy/winding down my business as a result of COVID-19.”
As a political aside: to the question: “Governments’ performance around “second wave“ restrictions and reporting COVID-19 health statistics,” the CFIB’s Alberta respondents rated the quality of the response the lowest in the nation.
On the consumer debt situation, in Equifax Canada’s most recent report to 30 September), Fort McMurray leads urban centres at $39,811 in average personal debt, Calgary is the next highest debt level of $29,107 with Edmonton third at $27,633. Delinquency rates have actually fallen across the country (compared to last year, presumably courtesy to the federal government) but have fallen the least in Alberta’s three centres of Calgary, Edmonton and Fort McMurray. Fort McMurray leads the country with a delinquency rate of 1.66 per cent, followed next by Edmonton at 1.4 per cent, andCalgary fourth (after St. John’s) at 1.17 per cent. Such numbers do not augur well for the financial strength of an Alberta-based financial institution.
As the report went to the full board on or before 19 November when the second wave of COVID was rearing its ugly head in Alberta, reporting a profit in this environment seems incongruous. Moreover, Alberta’s November unemployment rate of 11.1 per cent is second only to Newfoundland and Labrador and is the highest among the four largest Canadian provinces. Were any of ATB’s directors or executive nervous about approving these statements?
These trends can not be good news to the credit analysts at ATB. Yet from August to mid-November, when the board of ATB reviewed management’s proposed financial statements, the provision for credit losses fell by $200 million. This should be a head scratcher for Alberta’s Auditor General’s Office (who do not opine on quarterly statements but do attend the Audit Committee of the board), and Treasury Board and Finance supervisors.