DBRS Morningstar Confirms Ratings on Laurentian Bank of Canada, Changes Trends to Stable

DBRS Limited (DBRS Morningstar) confirmed its ratings on Laurentian Bank of Canada (LBC or the Bank), including the Bank’s Long-Term Issuer Rating at A (low) and its Short-Term Issuer Rating at R-1 (low). DBRS Morningstar revised the trends for all long-term ratings to Stable from Negative. The Stable trend on all short-term ratings has been maintained. The Bank’s Intrinsic Assessment of A (low) and Support Assessment (SA) of SA3 are unchanged. The SA3 designation, which reflects no expectation of timely external support, results in the final rating being equivalent to the Intrinsic Assessment.

KEY RATING CONSIDERATIONS
The trend change to Stable reflects DBRS Morningstar’s view that the considerable uncertainties facing financial institutions because of the Coronavirus Disease (COVID-19) pandemic have begun to abate. At the onset, DBRS Morningstar expected the economic impact of the various lockdowns on businesses across Canada to negatively affect LBC’s earnings and asset quality. Nevertheless, unprecedented support measures put in place through monetary and fiscal stimuli have largely mitigated the negative impact of the crisis.

The rating confirmations reflect LBC’s solid regional retail franchise in Québec and its growing national reach through B2B Bank, its commercial banking segment, and its online platform LBC Digital. Furthermore, the ratings are supported by LBC’s conservative credit culture and sound balance sheet fundamentals. The ratings also consider LBC’s relatively higher proportion of brokered deposits; its higher cost base; as well as its historically weaker capital position relative to peers.

RATING DRIVERS
Over the longer term, a sustained improvement in the level of earnings and operating efficiency and the strengthening of capital buffers would result in an upgrade of ratings.

Conversely, material losses caused by operational difficulties as the Bank implements various organizational projects, sustained negative operating leverage, or significant losses in the loan portfolio as a result of unforeseen weaknesses in the risk management process would lead to a downgrade.

RATING RATIONALE
LBC is Canada’s seventh-largest Schedule I bank with assets of $45 billion as at January 31, 2021. The Bank is well positioned in Québec through its branch network, offering retail services in the province as well as commercial lending across Canada and in the U.S. LBC also distributes financial products to brokers and financial advisors across Canada through its wholesale arm, B2B Bank. In November 2019, the Bank launched an online platform under the LBC Digital brand to expand its direct-to-client reach nationally. LBC also owns an integrated full-service institutional securities and investment banking firm, Laurentian Bank Securities, Inc.

In October 2020, LBC appointed a new president and chief executive officer (CEO), Rania Llewellyn, who has commenced a comprehensive strategic review for the Bank, which is expected to be presented later this year. In the meantime, Llewellyn has made several new key appointments and changes to the Bank’s executive ranks. Many of these incumbents have already had a long tenure with LBC and are part of existing succession planning.

Positively, LBC posted good earnings throughout 2020 and in Q1 2021 as the Bank managed to maintain healthy revenues and a relatively stable net interest margin. Furthermore, although LBC’s efficiency ratio remains one of the weakest among peers at 70% for Q1 2021, the ratio has been improving as a result of better cost discipline. The new CEO has announced her plans to focus on expense management while identifying structural cost optimization opportunities that align with the future strategic direction of the Bank.

The Bank entered the current downturn with a solid track record of strong asset quality, resulting in low impairments and loan losses. However, forced business closures and disruptions throughout the last year because of the pandemic have caused gross impaired loans to rise by 30 basis points (bps) to 0.82% of gross loans in Q1 2021 versus Q4 2019. Impairments remain at manageable levels and losses have been modest as government stimulus and aid has provided substantial mitigation throughout 2020. Nevertheless, DBRS Morningstar remains cautious that impaired loans may continue to trend upward as a result of prolonged business shutdowns in response to the pandemic, especially given the increased prevalence of coronavirus variants.

DBRS Morningstar views LBC’s funding and liquidity positions as stable. LBC maintains a strong branch-raised deposit base in Québec and has attracted direct deposits on a national level through LBC Digital. The Bank reported a CET1 ratio of 9.8% as of January 31, 2021, an 81 bps improvement from the previous year, largely reflecting internal capital generation and flat risk-weighted assets, providing the Bank with a capital cushion of approximately $555 million. In DBRS Morningstar's view, LBC should continue its prudent approach to managing capital, given both the current environment and the fact that the timeline for the Bank's implementation of the advanced internal rating-based approach is under review.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Laurentian are as follows: Franchise Strength – Strong/Good; Earnings Power –Good; Risk Profile – Good; Funding & Liquidity – Strong/Good; and Capitalization – Good/Moderate.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 8, 2020; https://www.dbrsmorningstar.com/research/362170). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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