As regular readers are no doubt acutely aware, Alberta is in trouble.
The province is at the heart of Canada’s dying oil patch and crude’s inexorable decline has had a devastating economic impact.
30% of provincial revenue is derived from resources and as crude collapsed, so did oil and gas investment. O&G spending plunged by more than a third in 2015 and as provincial authorities wrote in their latest fiscal update, “weakness in the oil and gas sector has spread to other sectors of the economy.”
As the layoffs piled up, so too did the social consequences of the bust. Food bank usage rose, property crime soared, and suicide rates spiked.
The recent rally notwithstanding, the outlook for oil prices is grim. Overnight, Saudi Aramco Chairman Khalid Al-Falih announced his company hasn’t reduced its investment capacity which suggests they’ll be no abrupt about face on the supply side from Riyadh and Iran is set to ramp production by 1,000,000 barrels per day by the end of the year.
In Canada, WCS is sitting just a dollar above the marginal cost of production and Stephen Poloz didn’t do drillers any favors by eschewing a rate cut last week.
Just in case you needed another reason to fear for the worst in Alberta, Moody’s and DBRS are becoming increasingly concerned about crown corporation ATB Financial. “Alberta's debt situation was under the microscope last week, with [the] two rating agencies taking a look at the province's fiscal situation and economy and not liking what they saw,” CBC reports.
Part of the problem is ATB, whose loan book has doubled since the crisis. “ATB has always been a curious creature,” CBC goes on to say, adding that the lender was “created in the depths of the Great Depression, when other banks stopped offering credit in the province, its mandate has always been partly about community building.”
Yes, “community building,” which in Alberta involves lending to O&G operations.
In short, the bank’s mandate effectively means it isn’t allowed to pull back on lending when things get dicey and now, some worry its exposure to souring energy bets could end up imperiling Alberta’s finances. Here’s more from CBC:
ATB said that in the last quarter of 2015, when oil prices were still falling and jobs were being shed every day, it increased its loans to small and medium-sized businesses by nearly 30 per cent.
While access to credit is clearly good for businesses, it does lend extra risk to the province in a time when the economy is faltering.
ATB's provision for loan losses increased by 500 per cent in the past year. It wrote off $30 million in bad energy loans in the most recent quarter.
All lenders to the energy sector in Alberta are facing the same pressures, but ATB is not diversified geographically.
It can't lend in B.C. to offset risk in Alberta, which is another reason why Moody's is watching the situation.
Until 2011, ATB typically had more deposits on its books than loans outstanding, but that changed as it's worked more aggressively to gain market share.
"We are still looking at energy exposure as a mainstay of our business. Are we spending a bit more time? Are we sensitizing things carefully? Absolutely. And that's what we should be doing. We are not a lender of last resort, but we are here to stay the course," said Edgelow.
As of 2015, it had $37 billion outstanding in loans and $30 billion on deposit. In the fall budget, the province increased the size of ATB's credit line by $1.5 billion so that it didn't have to pull back on lending.
ATB's deposits are all backed by the province.
In other words, here is a state-backed lender that's essentially required to double down on its exposure to energy loans at the absolute worst time imaginable and there's already a $7 billion gap between loans and deposits.
Of course continuing to finance the O&G sector means ATB is effectively contributing to the very same supply glut that caused oil to collapse in the first place.
One wonders what happens in the event the bank suddenly has to take a massive writedown on its energy book. Actually one doesn't wonder. One knows what will happen: Alberta will have to bail the bank out, setting up a ridiculous scenario wherein provincial authorities will be forced to inject capital to cover losses on loans they forced the lender to make.
Perhaps ATB's board should revisit the spectacular collapse of the GSEs in the US for a refresher on what happens when things go horribly awry at state-sponsored entities tasked with preserving the "dream."