This Canadian continues to increase its earnings and expand its Internet operations outside of Quebec, but strong competition from the Big Five may frustrate its growth.
LAURENTIAN BANK OF CANADA (Toronto symbol LB; www.laurentianbank.ca)is Canada’s eight-largest publicly traded bank, with total assets of $43.1 billion.
Laurentian Bank is mainly focused on operations in Quebec and Ontario. Roughly 53% of its loans are in Quebec and 33% in Ontario.
In late 2015, the bank appointed Francois Desjardin as the new CEO. Desjardin produced a 7-year strategic plan, aimed at achieving higher growth and better profitability for the bank. It calls for a doubling in the size of Laurentian between 2015 and 2022 with interim targets set for 2019.
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The first interim target is to grow loans to business customers by 60% of their 2015 level and residential mortgages through independent brokers by 50%. This implies an additional $5 billion of commercial loans and $4.3 billion of residential mortgage loans by 2019.
In June 2016, Laurentian bought U.S.-based CIT Group Inc.’s Canadian equipment financing and corporate financing business for roughly $1 billion.
The bank grew its net income, excluding one-time items, by 7.5% a year, from $130.4 million in 2011 to $187.0 million in 2016. Per-share earnings rose 3.0% per year, from $4.93 in 2011 to $5.70 in 2016, on more shares outstanding.
In the fiscal 2017 first quarter, ended January 31, 2017, Laurentian’s revenue rose 8.2%, to $241.6 million from $223.2 million a year earlier. Excluding one-time items, earnings rose 20.7%, to $52.7 million or $43.7 million. Per share earnings rose just 2.9%, to $1.43 from $1.39, on more shares outstanding.
The acquisition of CIT Canada in June 2016 and a strong real estate market pushed up results in the latest quarter.
While supportive of the overall growth target, real estate lending also presents risks for the bank. Total real estate lending, including residential mortgages, home equity loans and corporate real estate loans, amounted to $21.9 billion, or 65% of total loans, at the end of the first quarter of 2017. The proportion of real estate lending by the big five banks is below 50%.
However, the bulk of Laurentian’s real estate lending is to customers in Quebec and only 23% to the “hot” markets of Toronto and Vancouver. In addition, 50% of the loans are insured and the loan-to-value ratio on new loans is a modest 63%. These are factors that will provide a measure of protection to the balance sheet of the bank in case of a sharp downturn in the real estate market.
As a second interim target, Laurentian intends to grow its mutual fund assets by 80% to $6.0 billion in 2019. However, that asset base has hardly moved from the starting point of $3.3 billion in 2015. At the same time, investors increasingly favour cheaper ETFs over mutual funds.
The bank aims to increase its profitability to the same level as the major Canadian banks by 2022. A key element of this goal is the reduction of its non-interest costs and its efficiency ratio (which measures non-interest expenses as a portion of total revenue). Laurentian has already made some progress with its efficiency ratio. By the end of 2016, it had fallen to 67.4% from 70.1% a year earlier.
Apart from reducing staff costs, the bank also intends to further cut its 150 branches (which are all in Quebec) down to 100. It will also consolidate some of its other 35 offices throughout Canada.
Laurentian raised its quarterly dividend by 1.7% with the February 2017 payment, to $0.61 from $0.60. That’s the second increase over the last year. The shares now yield a high 4.5%.
To meet its targets, the bank hopes to grow its lending considerably despite the highly competitive market. That will involve competing against new “fintech” entrants (upstart financial technologies, comparable perhaps to Uber or AirBnB). Whether Laurentian can do that is uncertain, especially if residential lending slows.
53% of loans in Quebec
It also needs to successfully cut branches and costs. The bank’s focus on Quebec (53% of loans) also adds risk. In addition, roughly two-thirds of Laurentian’s workforce is currently unionized and the collective agreement with its union will be up for renewal again in 2018.
Laurentian Bank has prospered in the past couple of decades. But it has lagged far, far behind Canada’s Big Five banks—especially so when compared to our two favourites, TD Bank and Bank of Nova Scotia. For legal and cultural reasons, the big five have dominated Canada’s banking industry for many decades, and we see little reason to expect a change.
For one thing, the current arrangement helps Canada maintain outstanding banking stability, in sharp contrast to the U.S. experience in the past decade.
To catch up with the Big Five, much less gain on them, Laurentian has to deal with the challenges we mention above. In the meantime, it may provide a slightly higher dividend yield than the big five, at a cost of slower growth. We feel TD and Bank of Nova Scotia provide all the investment exposure you need to Canada’s banking industry.
TSI Network recommendation: Laurentian Bank is okay to hold, but only for aggressive investors who want to bet that it’s headed for a major speedup in its growth.
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