DBRS Upgrades Laurentian Bank Long-Term Ratings to A (low), Confirms Short-Term Rating at R-1 (low), Stable Trends

DBRS has today upgraded Laurentian Bank of Canada’s (Laurentian or the Bank) long-term ratings, including its Issuer Rating and Deposits & Senior Debt ratings, to A (low) from BBB (high) and its NVCC Preferred Share rating to Pfd-3 from Pfd-3 (low). DBRS has also confirmed Laurentian’s Short-Term Instruments rating at R-1 (low). All trends are now Stable. DBRS has also discontinued its rating of the Bank’s Cumulative Preferred Shares because there are none outstanding.

The ratings upgrade resolves the positive trend which DBRS has held on Laurentian’s long-term ratings for two years. Laurentian’s credit profile has benefitted from diversification both geographically, through increased presence outside of Québec, and by business line, notably with the growth of B2B Bank. Efficiency at the Bank has been more recently trending in the right direction, and management has targeted further efficiency improvements over the medium term, particularly through the expansion of higher margin products and business lines which, if realized, should support the earnings profile of the Bank. DBRS anticipates that efficiency and geographic diversity should continue to improve, particularly as B2B Bank becomes a larger contributor. The rating is supported by the Bank’s overall lower-risk business profile, which is focused on retail lending funded by retail deposits, real estate and mid-market commercial financing, serves financial advisors and brokers through B2B Bank and includes a mid-sized Montréal-based capital markets business. Its high-cost structure and remaining geographic concentration remain challenging.

While low provisions are supportive of the rating, like its Canadian peers, the Bank has exposure to the Canadian residential mortgage market and other real estate lending. A slowdown in these markets may slow earnings generation, while a downturn in the residential mortgage or commercial real estate markets could hurt asset quality and ultimately have an impact on provisioning levels.

Laurentian’s improved earnings profile has contributed to its ability to sustain profitability from core businesses, despite the fact that the Québec economy has generally been slower than other regions of the country. Segment and geographic diversification continues to improve with the growth of B2B Bank (organically and through acquisitions). B2B Bank accounted for 30% of adjusted segment net income for the first three quarters of 2014, excluding the Other segment. While the majority of profitability is being generated outside of Québec, Laurentian has yet to make substantial headway reducing geographic concentration of loans with 61% in Québec at Q3 2014.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2014), Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013) and Criteria: Support Assessment for Banks and Banking Organisations (January 2014), which can be found on the DBRS website under Methodologies.