Canadian Western Bank looks east via Internet

By Lynne Olver

TORONTO (Reuters) - Amid the week's financial-sector chaos in the United States and wildly gyrating stock prices, a Canadian chartered bank has started an Internet version to gather new deposits outside its traditional business area.

Canadian Western Bank, which operates primarily in the provinces of Alberta, British Columbia, Manitoba and Saskatchewan, did a "soft launch" of its online bank this week, President and Chief Executive Larry Pollock told Reuters on Thursday.

"We're just testing the market," Pollock said, noting that the online bank had been planned for six or eight months.

"I guess there could never be a bad time or a good time, it's just something we're testing for now," he said.

"We don't know how much money we're going to get ... we don't really know what to expect."

Called Canadian Direct Financial, it offers savings accounts and guaranteed investment certificates. New customers need a bank account at another Canadian financial institution to get started.

"It will give us access to geographical markets that we're not in," Pollock said. "We're in the four Western provinces only, so by using the Internet we can access markets right across the country."

The Edmonton, Alberta-based bank already operates online in its direct-to-consumer home and auto insurance unit, where Pollock said half of all auto policies are now sold online.

Various Internet banking options have sprung up in Canada in the past decade, with insurance companies, retailers and credit unions getting involved. Many of them lure customers with high interest rates.

But customers can switch in and out of high-interest savings accounts very quickly, Pollock noted, and if the financial institution pays a high rate to customers while investing the funds in low-yielding securities, "how do you make money?" he asked.

"If we launched this and got C$2 (billion) or C$3 billion, we wouldn't know what to do with it, we'd be earning a negative spread on it as well," Pollock said.

However, the beauty of online deposit-taking is that growth can be controlled, he added. Really good rates will attract lots of money and low rates won't.

"It's a convenient way to supplement your liquidity if you need to ... you can crank the rate up, get some money, turn it down, stop it," he said. "It's sort of like turning the tap on or off."

Canadian Western, the country's seventh-largest bank by market value, has reported a 16 percent rise in net income in the nine months ended July 31, but it is the country's worst-performing bank stock in 2008.

Even with a 5 percent gain on Thursday -- the stock closed at C$22.06 -- Canadian Western shares have fallen almost 30 percent year-to-date, after outperforming peers in 2007.