Alaska banks have been in a rut in recent years because of the state's stagnant economy, but their fortunes could change soon as Alaska gears up for what is expected to be the world's largest construction project: a natural gas pipeline with an estimated price tag of $30 billion.
Last month the oil companies BP PLC and ConocoPhillips Co. announced they would be spending $600 million on engineering and preparation for the construction of the Alaskan gas pipeline, dubbed Denali, which could run from Alaska's North Slope to either Alberta, Canada, or a state in the northern United States.
The oil companies are shooting to begin construction in two years. The pipeline is expected to create 10,000 jobs and, when completed, carry 4 billion cubic feet of natural gas a day.
The economic activity generated by the pipeline is likely to a boon for state's banks, which have struggled of late as the state has confronted its own real estate downturn. With credit-quality problems mounting, first-quarter net income fell at most of the six banks headquartered in the state.
The idea of a natural gas pipeline in Alaska has been floating around for nearly 30 years, but the project has its best chance of becoming a reality with oil prices continuing to rise, said Becky Pendleton Reid, a senior account manager at Len Cereghino and Co. in Seattle.
"The economics of the pipeline are more compelling now than they ever have been, and that's why the oil companies are willing to spend their money" to prepare for its construction, Ms. Reid said.
The Alaskan government is considering an alternative proposal from the oil company TransCanada Corp., which is bidding for a state license, but it is widely believed that the two proposals could be merged, and construction on the pipeline could start before the end 2010, and be completed by 2018.
Of course, Alaska, as a major oil producer, benefits greatly from rising oil prices, and banks can expect a trickle-down effect as the state begins investing oil proceeds in capital projects.
But the gas pipeline, bankers say, will be a difference maker.
David Lawer, a senior vice president of the $2.3 billion-asset First National Bank Alaska in Anchorage, said the bank's assets should grow by 50% within five years.
"Our largest group of customers are contractors and businesses who provide goods and services to the oil producers — and that $600 million is going to be spent almost exclusively with" those types of businesses, Mr. Lawer said. "Consequently, they are going to need both financing, but also more cash management services as their deposits increase."
The bank may open more branches once construction starts, but it may not need to, as its branches still have plenty of capacity in the least dense state in the country. First National has also added remote deposit for individuals and businesses in areas far from its branches.
Marc Langland, the chief executive of the $1 billion-asset Northrim Bancorp Inc. in Anchorage, said the company's assets and earnings streams should grow as the state's economy does.
"In a state that only has 650,000 people, any kind of activity like this will be a nice shot in the arm," Mr. Langland said. "This will provide stability and keep us out of a recession."
Northrim, like other Alaska banks, has had lukewarm earnings the last several years with the state economy growing at just single-digit rates. More recently, Mr. Langland said that banks there are also dealing with deteriorating credit quality as a result of the U.S. housing market slump — though the problems are not nearly as severe as they have been in markets such as Southern California and Florida.
Northrim's first-quarter net income fell 21%, to $2.1 million, and its loan-loss provision nearly quadrupled, to $1.7 million.
Kristin Hotti, an analyst at Howe Barnes Hoefer & Arnett Inc. in San Francisco, said Northrim's earnings in the near term will continue to suffer as the company works through credit problems. But as the oil companies begin to contract with other firms to prepare for the pipeline construction, loan and deposit growth should rise enough at Northrim — and other banks with customers involved in oil and gas exploration — to offset any lingering credit problems, Ms. Hotti said.
Northrim already has the staff needed to absorb the increased growth over the next several years, but will likely hire more people once construction starts, Mr. Langland said.
Craig Inghram, the CEO of the $262 million-asset Mt. McKinley Bank in Fairbanks, said his city is poised for significant growth because construction of the pipeline will be headquartered there and Fairbanks' businesses and residents would also likely benefit from the availability of lower-cost natural gas.
Alaska's economy should also benefit from an increase in state spending on capital projects, as the state's cut of revenue from the pipeline flows into state coffers, said Brian Nerland, Alaska district president for the $101 billion-asset KeyCorp of Cleveland.
As it is, the state's economy is starting to capitalize on the surge in oil prices, Mr. Nerland said.
More than 85% of the state's revenues come from oil, and each resident receives a share of the revenue from the state's Permanent Fund. According to the Alaska Department of Labor and Workforce Development, the state's general revenues were projected to rise 64% in 2008.
The state also receives revenue from the mining of minerals such as gold, silver, lead, and zinc, so it is benefiting from their skyrocketing values and increased production. Mineral production more than doubled in 2006, to $2.9 billion, with the state's cut ballooning to $18.8 million. The state expects its revenue share to grow an average of 24% a year through 2011.
To accommodate the expected spike in economic activity, Key Bank has hired 10 additional employees, in mortgage lending, private banking, and cash management and deposit services, Mr. Nerland said,
Once construction of the pipeline starts, the bank expects to hire more, though it may lose some who would rather work on the pipeline project, he said. "It'll create some challenges no doubt, in turnover and training, but that's a good problem to have."
