DBRS Changes Laurentian Bank Long-Term and Issuer Rating Trends to Positive, Short-Term Trend Remains Stable

DBRS Limited (DBRS) has today changed the trend to Positive from Stable on all long-term ratings of Laurentian Bank of Canada (Laurentian or the Bank). The short-term rating trend remains Stable. At the same time, DBRS has also confirmed Laurentian’s long- and short-term ratings, including Deposits & Senior Debt at BBB (high) and Short-Term Instruments at R-1 (low).

The trend change to Positive reflects DBRS’s view that Laurentian’s earnings profile has continued to improve over the last four years as a result of execution of its strategy, including increased segment diversification and consistent internal capital generation from core businesses. The global financial turmoil of the last four years has had little effect on the Bank’s growth.

Further positive rating actions will be contingent upon Laurentian Bank’s ability to sustain or grow profitability in the face of a slowing Québec economy, to continue to increase segment and geographic diversification and to make sustainable gains in managing its high cost structure while maintaining conservative credit and financial risk profiles. Per DBRS criteria on preferred shares and equivalent hybrids, it should be noted that there are potential notching implications for Preferred Share ratings should the Issuer Rating for Laurentian Bank be upgraded to the “A” range in the future.

The success of the Bank’s strategies in each segment has translated into growth in net income from 2007 to 2011. For the first nine months of 2012, Laurentian Bank earned net income of $104 million, resulting in internal capital generation of 6.7%, a substantial increase from 2007. Since 2007, the mix of Laurentian’s three retail and commercial segments have been shifting to provide a more balanced earnings profile without any segment being outsized. Retail & SME Québec, B2B Bank and Real Estate & Commercial accounted for 28%, 28%, and 39% of net income (excluding transaction and integration costs and the Other segment) in the first nine months of 2012, respectively. DBRS expects each of these segments to represent approximately 30% of net income in the future in order to contribute to a stable earnings profile. This shift also improves geographic diversification, as B2B Banking is a national business while Real Estate and Commercial are focused on Ontario, Québec and western Canada. The improvement reflects the aforementioned strengthening earnings profile.

Going forward, the acquisition of AGF Trust on August 1, 2012, and MRS group of companies on September 2, 2011, could be substantial contributors to geographic and product diversification. Both acquisitions provide Laurentian with strengths in the self-directed RRSP area and are consistent with the Bank’s strategy to expand its wealth management operation and increase fee income, which over time could prove beneficial to Laurentian Bank’s franchise.

The ratings are supported by Laurentian’s overall low-risk business profile, which is focused on retail lending funded by retail deposits, real estate and mid-market commercial financing, along with a mid-sized Montréal-based capital markets business. Laurentian’s underlying asset quality profile has strengthened over the past several years as the loan mix has shifted to a greater proportion of secured lending and the point-of-sale portfolio continues to wind down.

Note:
The Cumulative Preferred Shares rating is notional as there are no outstanding shares.

All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2012), DBRS Criteria: Rating Bank Preferred Shares and Equivalent Hybrids (June 2009) and DBRS Criteria: Intrinsic and Support Assessments (February 2009), which can be found on our website.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.