The future continues to look bright for Cana-dian Western Bank, the Edmonton-based regional bank that has branches in five provinces and $8.9 billion in assets. Carried along on the tide of the commodity-based good fortune that is sloshing through the bank’s core markets of Alberta and British Columbia, CWB’s revenue has risen by about 20% in each of the past two years.

But it’s not just conventional banking activities that are fuelling the stellar growth. Much of the increase is coming from CWB’s expanding activities in its trust and property and casualty insurance businesses. Revenue for those two groups grew by 15%-20% during the same two-year period; currently, they are contributing about 22% of the bank’s overall revenue. Even more telling is the bank’s prediction that this figure is expected to increase to about 30%.

Not that president and CEO Larry Pollock wants to see core banking continue to grow at 20% a year. “If we keep growing that fast, we’ll blow up,” he says.

But there are signs, as economic growth in Alberta slows, that Pollock may not need to worry too much on that front. In Alberta, real gross domestic product is expected to be 2.5% in 2008, down from 3.5% this year. The Alberta housing market has already cooled and a softening in the oil services sector is also underway, exacerbated by the province’s proposal to increase oil and gas royalties.

The outlook is slightly better in B.C., where the hot mining sector and construction for the 2010 Olympics should foster some growth.

Pollock expects the recent torrid pace at CWB likewise to cool but, that being said, he still expects healthy growth at CWB. The bank is opening four new branches in Alberta aimed at increasing CWB’s retail banking business. Currently, it has branches in B.C., Alberta, Saskatchewan and Manitoba. Trust subsidiary Canadian Western Trust Co. has offices in Calgary, Edmonton, Vancouver, Winnipeg and Burlington, Ont., while CWB’s other trust subsidiary, Valiant Trust Co. , is planning to open an office in Toronto, adding to offices in Alberta and B.C.

As well, Pollock notes, some lenders have left the residential mortgage market, as typically happens when the housing market softens. This leaves more room for regional banks such as CWB.

In terms of commercial lending, Pollock notes: “There are still some very good clients that don’t deal with us.” He does acknowledge, however, that there can be difficulties with commercial lending in boom times. “Even turkeys can fly in a hurricane,” he says. It’s important, he adds, to assess the soundness of a company’s underlying fundamentals. But, he points out, such concerns also apply when the economy is slowing.

Geographically, the bank is not looking for major business growth in Saskat-chewan and Manitoba, which comprise only 6% of its total revenue. In addition, the 3.25% capital tax charged in those provinces is a major barrier to a big expansion push, Pollock says.

The capital tax is not nearly as high elsewhere. As a result, CWB sometimes books commercial loans originating in Manitoba through its Calgary offices. It is not yet taking this approach with Saskatchewan-based loans.

Fortunately, the bank managed to stay well clear of the recent problems with asset-backed commercial paper. “We studied the securitization business and didn’t understand it,” Pollack says. “We also felt it didn’t fit our business model, which is based on strong relationships with clients.”

CWB may, in fact, be a bit of a beneficiary of the ABCP turmoil because it could buy previously securitized assets that other financial institutions may have to sell in order to remain liquid. Pollock says CWB is very well capitalized and very liquid, putting it in a position to buy such assets.

Nevertheless, Pollock isn’t happy about the collapse of the ABCP market because it affects everyone with whom the bank deals — from other banks to customers to corporations that may have held the paper. “It leaves me with a knot in my stomach,” he says.

One fallout of the ABCP debacle has been an increase in the spread between bank and Government of Canada paper. In most cases, it has increased to 75 to 80 basis points from 10 to 15 bps because the financial institutions involved in the ABCP market need to increase deposits. As CWB wasn’t involved in ABCP, it has raised its spread to only 40 to 50 bps.

@page_break@Pollock notes that the economic uncertainty is a global problem. The U.S. subprime mortgage meltdown, for example, affects CWB because the slowdown in the U.S. housing sector affects B.C.’s lumber industry. Pollock expects the U.S. housing market to be rough throughout 2008.

CWB can boast an advantage that many other companies can only envy: it is known as an outstanding employer. It was selected as one of 50 Best Employers in Canada in 2007 and, as a result, has far less difficulty attracting and retaining staff compared with some of its competitors — even in the midst of an economic boom. CWB employees, particularly at the senior level, don’t move around a lot, Pollock says. He puts this down to CWB’s human resources policies, which include:

> Stock ownership. The bank puts in $1 for every $2 that employees put into the stock purchase plan. Eighty per cent of employees are shareholders.

> “Work/life balance” program. This aims to avoid “burnout” by discouraging things such as working all night.

> Payment for ideas and attracting staff. Employees are paid when they come up with ideas or suggest potential employees that work out.

> Mortgages. Employees get mortgage subsidies.

> Holidays. Every employee gets an extra day off each year, which, Pollock says, has reduced sick days. Holidays are increased on a pro-rated basis rather than jumping to a new level at specified intervals.

The bank’s recent numbers point to its overall success. CWB reported net income of $66.7 million in the nine months ended July 31, up 31.3% from $50.8 million in the same period a year earlier. Revenue was $191.1 million, up 22.8% from $162.2 million a year prior. As of July 31, the bank had a 12-month trailing return on equity of 16.5%, up 14.1% from a year earlier. The widely held shares — 31 million as of Dec. 31, 2006 — were trading at $29 each in early October. The share price has been moving up steadily since 2003.

CWB’s efficiency ratio (non-
interest expenses as a percentage of total revenue) dropped to 44.8% from 46.4%. One reason for CWB’s strong efficiency is that the bank is not in all of the business sectors that its bigger peers pursue, including wealth management and trading. But CWB also has a dedicated “process improvement” team that does nothing but look for ways to increase efficiency.

In addition, CWB management sits down once a year and looks at each business sector, hunting for ways to make them better and more profitable. “This brings the culture of growth into the organization,” Pollock says. “Everyone thinks ‘growth’.”

Here’s a closer look at CWB’s business lines:

> Personal Banking. CWB focuses on personal banking and has recently announced the opening of four new branches; two in Calgary, one in Edmonton and one in Medicine Hat, Alta. That will bring its branch count in Alberta to 18. There are 16 branches in B.C., three in Saskatchewan and two in Manitoba.

The bank’s strategy in personal banking is what Pollock calls “high-touch service.” This includes remembering customer names when they come into the branches and being ready to serve people immediately. CWB prides itself on avoiding half-hour waits in the branches and providing answers quickly. It does not have voice mail, so customers always get a person when they call. CWB also continues to improve electronic access.

> Commercial Banking. This is a very strong area in which the bank targets mid-sized companies as its clients. Pollock expects to grow by attracting new customers; in preparation, CWB is increasing its capacity.

The bank makes general commercial loans, including: lines of credit and operating and term loans; real estate loans for commercial premises, as well as for construction and development; industrial term loans on equipment and financial leasing activities; and energy-related loans.

Customers with large borrowing requirements are accommodated through loan syndications with other financial institutions.

> Insurance. CWB bought Van-couver-based auto and home insurance provider Canadian Direct Insurance Inc.from HSBC Bank Canada in 2004 for $25 million. CDI contributed $8 million-$9 million (8%-9%) to CWB’s net income in the nine months ended July 31.

Run independently of CWB, CDI operates only in B.C. and Alberta and has about 160,000 policies in force. It has two call centres and also delivers services over the Internet, which accounted for about 40% of its sales in the nine-month period.

CDI got an exemption from the mandatory price reductions for auto insurance premiums instituted by the Alberta government during the past few years because it proved that it was already a low-cost producer. The price reductions forced on other auto insurers has squeezed CDI’s price advantage somewhat, but it has continued to have good success in penetrating the market.

In B.C., where the government provides basic liability auto insurance, CDI offers top-up insurance, which includes collision, fire and theft coverage.

CDI is running a pilot project in B.C. to deliver white-label home and auto policies through the insurance brokerage network. It can deliver these policies through the Internet. If this works, it will expand the project into Alberta and maybe beyond, Pollock says.

CDI is actively looking to acquire an insurance company that is broker-driven, giving it access to the independent advisor channel. It also plans to add products over time.

> Trust Services. CWT’s roots go back to 1995, when the bank bought Aetna Trust Co. CWT primarily offers investible asset custodial services for private financial planners or financial planning firms and independent brokers. CWT has $40 billion in assets under administration and 40,000 clients. CWT has offices in Ontario and all the western provinces.

CWT has been growing at about 20% a year and expects to continue to expand at that pace. A key advantage is that CWB is not in the financial planning business and, as a result, does not compete with CWT’s clients.

Valiant Trust offers stock transfer services, primarily to companies trading on the Toronto Stock Exchange and the TSX Venture Exchange. Valiant has more than 200 clients, up from 80 in 2004, when CWB bought the firm. Pollock calls Valiant an “extremely profitable” business.

Valiant does business in Alberta and B.C. directly and has been using co-transfer agents in Ontario. It has applied for a federal licence to open its own office in Toronto. Valiant also offers stock transfer services through co-agents in Toronto, London and New York. IE