DBRS Confirms Laurentian Bank Following MRS Announcement

DBRS has today confirmed the ratings and trends of Laurentian Bank of Canada (Laurentian or the Bank), including the Deposits & Senior Debt rating of BBB (high) and the Short-Term Instrument rating of R-1 (low) following the announcement of the proposed acquisition of the MRS group of companies from Mackenzie Financial. The trends remain Stable.

The MRS group of companies consists of MRS Trust and three carrying dealers that cater to firms regulated by the OSC, the MFDA, IIROC and the AMF respectively. The intention is to merge the acquired businesses, which have particular strengths in the self-directed RRSP area, with B2B Trust. In addition, the Bank also announced a new distribution relationship with Mackenzie; DBRS views the distribution deal as a modestly beneficial move for the bank.

This is a significant acquisition for Laurentian; at $165 million (including $50 million in goodwill), the purchase price is 15.6% of Laurentian’s common equity. In addition, the Bank will repay $20 million in subordinated indebtedness to Mackenzie.

The proposed acquisition requires multiple regulatory approvals including the MFDA, IIROC, the AMF, OSFI and the competition bureau.

DBRS views the proposed MRS acquisition as consistent with Laurentian Bank’s strategy. It expands the wealth management operation and increases fee income, both of which could be beneficial to the rating over time. However, the acquisition is not without risks, including integration and possible client attrition, particularly given that the Bank has not made a major acquisition for some time.

Management expects the acquisition to be modestly accretive in 2012 and $0.15 to $0.20 per share accretive in 2013 as a result of synergies related to scale, including systems, back office and compliance. Integration costs are expected to be $25 million plus additional IT investments of $13 million (both pre-tax).

The acquisition is expected to reduce Tier 1 capital by 70 basis points (bps) to 10.3% (pro-forma as at July 31, 2011) from 11.0%. DBRS estimates the tangible common equity ratio to risk-weighted asset ratio would decline from approximately 9.1% to approximately 8.4%. Despite the decrease, management expects to meet minimum Basel III requirements by January 1, 2013.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment and Rating Bank Preferred Shares and Equivalent Hybrids, which can be found on the DBRS website under Methodologies.