Has ATB listened?

A year ago, Parkland Institute released a report on ATB Financial called Alberta’s Public Bank: How ATB Can Help Shape the New Economy, co-authored by myself and Mark Anielski. Our report reviewed ATB’s storied history, the role of public banks more generally, and how money is created through the banking system.

A year later, I thought it would be useful to review the report’s recommendations in light of ATB’s public disclosures over the last year. This blog post addresses what, if any, of the report’s recommendations informed recent regulatory activities by the government or ATB’s public disclosures in quarterly and annual financial reports.

ATB is the crown jewel of Alberta’s provincial agencies. At the end of March 2019, ATB Financial had assets of $54 billion and 5,500 employees operating 174 branches and 143 agencies in over 247 communities. ATB’s wealth management arm, re-labelled ATB Wealth, has assets under management of $20 billion and the entity now is the majority owner of Altacorp, an investment bank.

Given that the Alberta government guarantees $36 billion in deposits, the management and direction of ATB is, or should be, of great interest to all Albertans, and especially Alberta’s MLAs.

Our study was meant to stimulate a public discussion of the mandate and role of ATB, and included a number of controversial recommendations, including:

1. provision of low-cost financing for Albertans,
2. provision of more financing for social housing,
3. provision of loans for Alberta’s Climate Leadership Plan programs,
4. holding more Government of Alberta bonds for liquidity purposes,
5. provision of agriculture loans, and
6. recapitalization of ATB.

One reason for the study’s timing was the requirement under the ATB Financial Act for a legislative debate on a motion to continue ATB. To my knowledge, this legislative requirement was never met or even acknowledged by the previous government (which could technically mean that ATB is operating illegally).

Another reason for the study was the recognition that the Alberta economy was in some distress. The authors, recognizing the powerful nature of a banking license as an enabler of economy activity, sought to put forward broad policy ideas for consideration by a government that, arguably, was desperate for new ideas to spur economic development. A third reason was that ATB was celebrating 80 years of operations.

Unfortunately, the report largely failed to foster a public or political debate. Not only did the legislative debate not occur, but no public mention was made by the former NDP government, which by September 2018 was in re-election mode and reacting to the Federal Court of Appeal ruling halting construction on the Trans Mountain pipeline. Thus, our effort to foment discussion about the catalytic role of a major public lending institution was arguably a failure.

There were a number of elements in our report that were critical of reporting aspects of ATB, and some reporting changes have been made by the corporation over the past year, which is very positive. There is still room for improvement on the reporting of the institution’s commercial loan book, but the reporting on corporate governance and executive compensation has improved dramatically since we released our report.

ATB’s board and management likes to compare itself to its major commercial competitors, the chartered banks such as BMO and RBC. The chartered banks are required to provide detailed disclosure about corporate governance and executive compensation in their annual directors’ circular. These disclosure documents, which typically run to over a hundred pages, provide minute detail about the nature of board governance, committee structures, meeting agendas, and listings of directors’ expertise and other boards sat on. Starting this year, ATB has definitely upped its disclosure game, bringing it close to the standard that would be expected of chartered banks. In a side-by-side comparison I conducted, of 24 distinct reporting features from RBC’s annual circular, ATB’s report dealt with all but three (experience matrix, remuneration peer group, and tenure break-down). Thus, ATB’s board, under new chair Joan Hertz, has brought in significant reporting changes that should be applauded.

In the case of executive compensation, ATB’s disclosure has advanced from a weak three-page general disclosure statement to 20 pages of substantive description, explanation, and tables on the compensation of its top five executive officers. Key changes from the previous, vapid disclosures include several areas that the Auditor General was critical of for most provincial agencies. These included a listing of which organizations and positions the board considered as peers (that is, where salaries and benefits should be roughly similar). The new disclosure also offers more insight into the board’s compensation philosophy and how compensation decisions are reached. Like the major chartered banks, there is also a brief description of the performance of the various executives, which, however, tend to be somewhat subjective.

Of 22 separate reporting items on executive compensation contained in RBC’s reporting, ATB met, in whole or in part, 18 of them. Of those items that were not disclosed, two are relevant: cost-of-management ratio, and indebtedness of officers. The cost-of-management ratio shows the total compensation paid to the officers compared to the total net income of the organization over the past five years. This provides a measure of how much is paid to the top officers and how much profit is left for the shareholders. This metric would be relevant for Alberta taxpayers and the government as steward of this organization. In the case of RBC in 2018, total compensation of the total five officers was $41.6 million, representing 0.33 per cent of the bank’s profits. In ATB’s case, total compensation was $10.8 of a net income of $139 million, for a ratio of 0.77 per cent. (Of the $10.8 million, Dave Mowat, ATB’s CEO from April 1 to July 1 in fiscal year 2018-19, took home $4.6 million in other compensation.) The second area of deficiency is the lack of disclosure of the indebtedness of officers. This is a significant omission since bank loans to employees can be made at below-market rates, which are a taxable benefit. In fairness, it could be that these executives do not have loans, but that fact should still be disclosed.

What is most interesting about ATB’s executive compensation disclosure in its current format is that it shields the disclosure of roughly a half-dozen other higher-remunerated executives, which were previously reported. Whereas in the past the inadequate disclosure covered 12 executives, the current, stronger disclosure covers only five executives. This position of posting fewer executive salaries is consistent with the position taken by ATB and other provincial financial agencies which sought, and achieved, exemptions from sunshine disclosure laws instituted several years ago. The fear was that high-priced financial executives working at ATB and Alberta Investment Management Corporation (AIMCo) would be “poached” by other institutions prepared to pay more for their talents. However, it’s worth noting that AIMCo did not reduce the number of executives it reported on, and continues to report their top 10 executives.

Another area where ATB has improved its financial reporting marginally is in providing more information about the economic sectors its lending is concentrated in. This is of considerable importance to financial analysts and rating agencies who watch exposures to the energy and real estate sectors. Up until 2010, ATB provided a breakdown of its commercial lending, including agricultural loans. In the recent annual financial statements, the concentration information was expanded to add energy loans and agriculture, forestry and fishing loans. Unlike the banks, which have a breakdown of about 10 industrial sectors they lend money to, analysts have had little knowledge of ATB’s commercial loan book. Now we know that ATB has about $6 billion in commercial real estate loans (which had been reported previously), $3.4 billion in energy loans, and $3.7 billion in agriculture, forestry and fishing loans. However, we do not know how well each of these sectors are performing in terms of loan-loss provisioning against these sectors. ATB’s exposure to the energy sector, and its provisioning against losses, especially for smaller producers, is important given a court ruling that creditors of bankrupt producers must assume the environmental liabilities (the Redwater Energy case).

Finally, our recommendations on regulatory capital have not be adopted. As argued in the report, a significant portion of ATB’s regulatory capital is not capital in the conventionally accepted world of banking supervision. Without this fictional capital of $1.95 billion, ATB would not have sufficient capital to grow. As our paper demonstrated, ATB holds powerful tools to lend money to individuals and businesses. If it grows without a sufficient capital base, it poses risks to ATB depositors, the government, and its citizens, who ultimately bear the risk. If ATB’s growth comes at the expense of fair but prudent lending criteria, this too will lead to problems. This is why it makes sense to normalize ATB’s capital structure.

While we have seen important governance measures taken, there remains considerably more to do to make ATB an important vehicle for a transition to a new economy, and one less dependent on lending to boom-and-bust economic sectors. There is still ample room for improvement, especially around loan and loan provisions by economic sector. While the needed debate over ATB’s continuance and mandate didn’t happen last year, there is still the opportunity for a broad discussion about the role of ATB in Alberta’s economy and how Albertans can best make use of this unique asset.

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