Laurentian Bank – Ouch, Underperforming the TSX

Laurentian Bank is a leading Canadian bank providing a broad range of advice-based solutions and services to its clients. It is a leading diversified financial services provider.

The bank provides a host of services to its clients ranging from commercial and private banking to equipment, inventory and real estate financing, and advisory services. The bank is also re-organizing its Commercial and Personal Banking into two operating units. 

Laurentian Bank caters to business, retail and institutional clients. The bank has the largest footprint in Quebec (43% of loans) and Ontario (33%). It has pan-Canadian activities and a growing presence in the U.S.(5%). Quebec is its home market and the bank also has a decent presence in the Atlantic provinces (2%). 

Laurentian Bank operates through its branch network based in Quebec and specialized teams across Canada. The bank operates through Laurentian Bank (business and retail services), B2B Bank, and Laurentian Bank Securities. It provides equipment and inventory financing through subsidiaries LBC Capital and Northpoint Commercial Finance. 

All in all, the group had total assets worth more than $44 billion and assets of ~$31 billion under administration.

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Key Investment Data

 

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Revenue Growth & Market Exposure

Laurentian Bank is a leading player in different market segments like retail, business, financial services, securities, and capital markets. It is the seventh largest Canadian bank. In addition, Laurentian Bank Securities offers integrated brokerage services to institutional as well as retail clients. 

As a diversified financial services provider, the bank is well-positioned to take advantage of opportunities in an evolving marketplace. Laurentian completed the migration of all B2B Bank products and loans to the core banking system. It also completed the conversion of the traditional branch network to a 100% advice model.

With 175 years of banking experience, Laurentian Bank is trusted for its quality services, prudent management, and good governance. Laurentian Bank is evolving its loan portfolio mix to include a greater proportion of higher margin commercial loans in the group (increasing to 40% currently from 27% in 2015), while residential loans comprise ~48%. 

The bank is also expanding its geographic footprint in the US with the country now accounting for 5% of the mix (from nil in 2015). Laurentian Bank is making progress towards launching its digital platform and increasing revenues from the commercial loan portfolio. 

The pandemic had an adverse impact on Laurentian Bank’s performance. The bank, however, witnessed a strong performance in capital markets, low provision for credit losses, and a healthy liquidity position during the latest quarter.

Dividends

Laurentian Bank has compounded its dividend growth by 4% over the last decade. The bank has a sound history of paying increasing dividends. It sports an attractive yield of more than 3.6% and a payout ratio of 43%. The company reduced its quarterly dividend by 40% in the last year.

Given its long history in the banking industry, Laurentian Bank is better placed to address changes in customer behavior influenced by changes in technology and the globalization of banking. Transformational processes including the implementation of the core banking system, the development of digital solutions, and the adoption of the AIRB approach should further strengthen the bank’s financial foundation. 

The bank’s focus on improving efficiency through measures such as the conversion of traditional branches to a 100% advice model, optimization of certain back-office functions, and merger of branches has resulted in significant savings.

Laurentian Bank has a good track record of strong credit quality and has access to well-diversified and stable sources of funding. Its CET1 improved 10.1% in the latest quarter driven by internal capital generation and a reduction in risk-weighted assets. Laurentian Bank also has a large pan-Canadian and targeted U.S. presence.

Increased customer focus, expanding geographic footprint, and evolution to higher-margin commercial loans have positioned Laurentian Bank for profitable growth in the future. In-depth knowledge of the Canadian banking industry and deep and long-term client relationships combined with the Group’s leadership position are major assets in the years of transformation.

The bank is expecting improved technology and better processes to drive future customer loan and deposit growth.

Laurentian Bank (LB) historical yield
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Competition

The financial services marketplace faces intense competition and Laurentian Bank’s performance is affected by the level of competition in all different market segments. 

Canadian Western Bank, National Bank, and VersaBank are Laurentian Banks’ top competitors. National Bank is the leading bank based out of Quebec and ranks amongst Canada’s six largest commercial banks.

VersaBank is a leading chartered bank in Canada, while Canadian Western Bank is known for providing specialized advice and financial services for business as well as personal banking and wealth management services. 

In addition, Laurentian Bank also suffers from competition from non-financial institutions offering banking products and services through electronic and internet-based financial solutions.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYieldYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:RYRYRoyal BankFinancial ServicesBanks - Diversified0.67126.18179.8212.8212.829.980.033.420.439044.320.102867Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:TDTDTD BankFinancial ServicesBanks - Diversified0.7782.95150.8410.6810.686.720.043.810.406043.160.130478Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:BNSBNSScotia BankFinancial ServicesBanks - Diversified0.7277.8794.3412.5512.556.270.054.620.572043.600.103168Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:BMOBMOBank of MontrealFinancial ServicesBanks - Diversified0.63123.5379.9213.5613.5610.450.033.430.465044.240.076757Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CMCMCIBCFinancial ServicesBanks - Diversified0.62145.0764.5812.2312.2312.670.044.030.491045.840.086668Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:NANANational BankFinancial ServicesBanks - Diversified0.6395.4932.2312.8612.867.750.032.970.380042.840.098267Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:CWBCWBCanadian Western BankFinancial ServicesBanks - Regional0.6934.012.9610.7110.713.260.033.410.365041.160.093977Tollbooth - UnregulatedYESYESYESNOCanada1
TSE:LBLBLaurentian BankFinancial ServicesBanks - Regional0.4242.401.8411.5611.564.190.043.770.435041.600.037715Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

Laurentian Bank should benefit from its large footprint in the Quebec market, which is expected to witness momentum in housing and job markets. Laurentian Bank continues to enhance its cost discipline to improve its overall efficiency.

The bank is well-positioned to gain from a strong and diversified commercial loan portfolio and a high-quality residential mortgage portfolio. Strong credit quality, a solid balance sheet, and a rigorous underwriting process help to position it well for the future.

LB vs TSX vs SP500 2021
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Laurentian Bank (LB) historical pe
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