- Consultation auprès des Canadiens et des Canadiennes -

Présentation de ATB Financial en réponse à la consultation sur les fusions de grandes banques du ministère des Finances Canada :�

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Our File: FG-270

7 January, 2004

Mr. Gerry Salembier
Director
Financial Institutions Division
Financial Sector Policy Branch
Department of Finance
Government of Canada
Ottawa, Ontario
K1A 0G5

Dear Mr. Salembier:

In February 2003, I was requested to appear before the Commons Finance Committee to testify on Alberta Treasury Branches' perspective on the bank merger guidelines. We have reviewed the Government's response of June 23^rd to Committee reports of the Senate and the House of Commons and would like to respond to several issues identified in the document. As noted in my February statement Alberta Treasury Board Presentation To the House of Commons Standing Committee on Finance February 4, 2003. (attached), the views following are views of the senior management of ATB Financial and do not represent the views of our owner, the Governm0-ent of Alberta.

Background

ATB Financial is a $13.8 billion, full service financial institution operating predominantly in Alberta. Our organization operates 145 branches and 129 agencies throughout Alberta, and serves over 500,000 Albertans through 210 ABM machines and a Call Centre in Calgary. At September 30, 2003, ATB's retained earnings were $862 million and our loans stood at nearly $12 billion. We have recently expanded our wealth management offering through ATB Investor Services and operate three subsidiaries in this competitive arena. Key target markets for ATB since inception have been the agriculture and independent business sectors. We are the largest lender to primary producers and independent business in Alberta with about $3 billion in understanding loans.

ATB is subject to its own legislation and provincial laws of general application. ATB operates independently from the Province of Alberta subject to the Alberta Treasury Branches Act and policy direction contained in a Memorandum of Understanding with the Minister of Finance. As a direct clearer with the Bank of Canada, ATB Financial is also subject to the rules of the Canadian Payments Association.

As part our business plan strategy, we are committing substantial resources to increase our presence in the two large urban markets in Edmonton and Calgary. This strategy can be achieved through acquisition of sites and construction of a new branch or through the acquisition of branches from one of our competitors.

Federal Policy

Since ATB actively competes with federal financial institutions, federal policies to enhance competition will shape the nature of the Alberta's financial services marketplace. As I stated before the Commons' Finance Committee, should a bank merger or an insurance-bank merger occur, we believe that regional financial institutions like ATB should be regarded as suitable acquisitions. We are concerned that banks and/or insurers that intend to merge will look to "national" institutions as buyers of bank branches to "simplify" the process of dispositions. We believe that strong regional players such as ATB Financial, with a strong deposit and lending base, should not be excluded from bidding on branches simply because we are unable to purchase branches in more than one province. Furthermore with our focus on small and medium sized business and in the rural communities of Alberta, a stronger ATB Financial would assist federal policy of enhancing competition in these areas.

We are also concerned that merged entities will not wish to sell branches in urban centres such as Calgary or Edmonton because of the dynamic nature of the Alberta economy and the fact that growth opportunities are greater than in other cities or parts of the country. This would be unfortunate since competition would be reduced in those markets. While we do not believe that federal policy should micro manage the bidding process, we strongly recommend that well-capitalized institutions like ATB Financial should be encouraged to buy redundant branches in these major urban markets.

If you have any questions, please contact the undersigned at 780-408-7330 or at bascah@atb.com We consent to this letter being posted on Finance's website.

Yours truly,

Robert L. Ascah
Vice-President
Corporate Planning
RLA/rla
c.c. Bob Normand, President and CEO, ATB Financial
Attachment

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Alberta Treasury Board Presentation
To the House of Commons Standing Committee on Finance
February 4, 2003

Mr. Robert Ascah (Vice-President, ATB Financial (Alberta Treasury Board)):

Madam Chair, Honourable members, ATB Financial appreciates the opportunity to present its views to this committee on the matter of bank mergers and the public interest.

Two caveats are necessary before proceeding. First, these are the views of ATB's senior management, not those of our shareholder, the Government of Alberta. Second, I will not address issues relating to the manner of ownership.

My presentation is divided into four parts. The first is a brief history of ATB to give you some perspective on our views. Second, I will look at some of the major elements of the current financial services environment we believe are important to understand the context of this important policy issue. Third, I will address the four elements of the public interest test the committee has been requested to examine. Finally, I will outline some attributes of a good merger policy and potential sources of competition, should large bank mergers be permitted to proceed.

In the 1935 Alberta general election William Aberhart won a landslide victory against the United Farmers of Alberta. Aberhart faced a treasury so empty that the civil service payroll was in peril. Initial loans were advanced from the federal government to avoid default, but eventually suspended over disagreement with the federal government about the creation of a loan council. As Alberta did not agree to the council, financial support was not forthcoming to Alberta, and on April 1, 1936, Alberta became the only province to default on its debt. The default radicalized the government, and a series of legislation, aimed primarily at the banking industry, was introduced, but defeated because of constitutional challenges, reservation, or disallowance by the federal government. Recognizing the creation of credit was central to the government's agenda. The Alberta government applied to the federal government for a bank charter, but it was refused. In 1938 the government passed the Treasury Branches Act that, with slight modification, remained intact until 1995.

The 1980s were an important period in ATB's evolution, because of a depression that resulted from falling oil prices. During this period the banks withdrew liquidity in the system, with loans declining by about 20%. During this period ATB increased its market share and established a strong loyalty among its customers, both large and small. Many of our customers still say, if it weren't for ATB, we wouldn't be here.

In 1996 the Treasury Branches Amendment Act was proclaimed, which created a board of directors to direct and manage the affairs of ATB. Here are some of the public policy directives that were articulated by the then provincial treasurer. ATB will operate on sound banking and business principles and not be a lender of last resort. ATB will remain a provider of services to all areas of the province. ATB will optimize profit by giving fair value to customers and meeting the commercially viable needs of Albertans. ATB will concentrate its services in independent business, agriculture, and consumer services. ATB will operate independently of the government.

In 1997 ATB's governing legislation was overhauled, making it a crown corporation. Since 1997 ATB has been profitable and has added nearly $900 million to retained earnings. We have a conservative risk profile, with approximately half of our assets in residential mortgages and consumer loans. The remaining loans are about equally divided between commercial, agricultural, and independent business loans. Like other financial institutions that seek to remain relevant to their customers, ATB has launched a wealth management platform both to meet the needs of our aging customer base and to reduce our dependence on spread income.

The committee may be particularly interested in ATB's network of rural branches and agencies. We have 104 of 145 branches located outside Edmonton and Calgary metropolitan areas. Approximately two-thirds of our deposit and loan business is done through our rural network. In addition, we distribute our services through 132 agencies. Agencies may be run by insurance brokers, grocery stores, travel agents, etc., and provide primarily deposit-taking, cheque-cashing, and loan referrals. We have not closed down any rural branches and have an understanding with the province that we will advise them prior to the closure of an agency or a branch.

There have been a number of developments since bank mergers were debated in 1998 that we believe have changed the nature of the debate. These developments include abolition in the United States of barriers between commercial and investment banking and interstate banking; in Europe the move to one market in financial services; the increasing globalization of capital markets through the drive for standardization and harmonization of accounting principles, capital adequacy rules, disclosure requirements; and in Canada there is the view in some quarters that banking services are analogous to utility services.

On the bank merger guidelines and the public interest, which we're here to discuss today, my remarks follow the points identified by the minister's October 24 letter.

It should be noted that access in 2003 is different from access issues faced in 1938 or 1998. We have telephone banking, a customer contact centre, Internet banking, debit card service, and over 200 ABMs. Last December 82% of our transactions were electronic. Over the past month the number of our telephone banking transactions fell below the number of Internet banking transactions for the first time.

The other facet of access is the ability of the public to acquire banking services, typically meaning a transaction account. Recently, the federal government has published draft regulations defining the conditions under which consumers have the right to banking services. This is an important step in the federal government's balancing of consumers' rights with the legitimate concerns of financial institutions about customer fraud.

The distinction between large and smaller business borrowers is important, because large corporate borrowers can borrow directly through the money markets. These larger corporations have access not only to Canadian banks, but also to foreign banks and capital markets. In a 2000 survey by the Canadian Federation of Independent Business ATB was found to have the largest reported market share in Alberta. We currently have about $1.6 billion in loans outstanding. We strongly believe commitment to this market over the long term is critical. It is a profitable area for us, and being limited geographically, we, of necessity and through good business practice, work with our clients to fulfill their needs. This is also very true in our agricultural portfolio.

I'm going to skip over the long-term prospects and talk a bit about the adjustment or transition issues.

From a financial perspective, it is important to ask how government intervention would affect the economics of a merger. Keep in mind that shareholders expect economies to be realized. The degree to which moral suasion or regulation inhibits banks from rationalizing operations will weaken the business case for a merger. If the government believes no more than, for example, 10,000 jobs should be eliminated, this should be communicated in policy.

There are two attributes for good merger policy. The first is transparency. Institutions should be clear about competition, safety and soundness rules, and the public interest test. For instance, how is adequate access to be defined? What employment losses are acceptable? The second is predictability. The entities proposing a merger should have a high degree of assurance that there is a likelihood of success if all criteria are met as set out in legislation, regulation, and policy.

Finally, on some of the sources of competition, my remarks are focused more narrowly on the deposit-taking sector. Without a lifting of ownership restrictions, it is unlikely we will see significant competition from foreign institutions. While it may be politically unpalatable for one of the big banks to be sold to a foreign bank, if large foreign banks were to bid for a significant portion of a bank's branch network, existing competition would be maintained, and possibly enhanced.

I won't comment on the credit unions, because they're ably represented here today.

Smaller institutions, like Canadian Western Bank, PC Financial, Laurentian Bank, and the new Bank West, have attractive propositions for their customers, but their ability to participate in a meaningful way again depends on access to significant amounts of capital. Laurentian Bank's purchase of Scotia Bank branches, the credit unions' purchase of Bank of Montreal branches, and CWB's purchase of Laurentian Bank branches illustrate that there is an appetite for taking over assets and deposit liabilities. Ownership liberalization in Bill C-8 would clearly enable a smaller firm to be taken over by a larger entity that, in turn, could provide capital for branch acquisitions.

Finally, ATB Financial has a long, rich history of offering competitive alternative financial services to Albertans. As I indicated earlier, we offer a menu of financial services similar to those of credit unions and the chartered banks. With respect to bank mergers, we would be an interested buyer. As a rule of thumb, the number of branches in a region compared to the total number of branches is a good proxy for market share. Calgary and Edmonton are markets where we are currently underrepresented. Therefore, in the event of an allowed merger, ATB sees opportunities to increase its market penetration through possible mergers of branches and an opportunity to attract customers and staff, either through negotiated transactions or general dissatisfaction arising from a large merger.

Thank you for your attention. I look forward to questions.