A Laurentian Bank branch in Montreal, on June 21, 2016.Paul Chiasson/The Canadian Press
As Laurentian Bank of Canada’s LB-T month-end deadline for finding an acquirer nears, Bank of Nova Scotia and Toronto-Dominion Bank have bowed out, shrinking the list of takeover suitors.
Scotiabank will not bid for Montreal-based Laurentian, the country’s ninth-largest lender, according to two sources familiar with the matter. It made its final decision on Wednesday, according to one of the sources.
The decision came just days before the deadline for first bids, which was set for the end of the month, according to three other sources familiar with the matter.
Toronto-Dominion Bank is also not bidding for Laurentian, even though it has excess capital after recently terminating its $13.5-billion deal for Tennessee-based First Horizon Corp., according to three more sources.
The Globe and Mail is not naming the sources because they were not permitted to discuss the confidential sale process. Laurentian, Scotiabank and TD all declined to comment.
Analysts expect Laurentian to make a final decision on an acquirer before the bank reports its financial results on Aug. 30.
Scotiabank was considered a potential buyer because its executives have identified Quebec and British Columbia as growth opportunities, particularly in commercial banking, a specialty of Laurentian’s. But Scotiabank is in the midst of its own overhaul. Its chief executive officer, Scott Thomson, who formally took on the role in February, is conducting a strategic “refresh” aimed at acquiring more customer deposits and retooling the bank’s operations in Latin America.
Scotiabank has also acknowledged its dependence on wholesale funding – that is, raising money in markets to fund lending activity – which is a costlier source of capital than core deposits. Laurentian is in the middle of its own three-year turnaround plan and has been addressing a similar funding issue.
On July 11, Laurentian confirmed that it is “conducting a review of strategic options” after The Globe reported that the bank was exploring a sale.
Laurentian launched the process more than a year ago, according to two of the sources. Its chief executive officer, Rania Llewellyn, engaged JP Morgan Chase & Co. in late spring of 2022 to advise the bank on potential growth opportunities, after it posted strong second-quarter results. Its share price was trading between $40 and $45, a relatively small discount to its book value.
JP Morgan’s mandate included scouting for potential acquisitions that could bolster Laurentian Bank’s retail, commercial and technology platforms, according to the sources. Laurentian also considered mergers with mid-sized financial services rivals, in which the bank would have been the dominant partner.
JP Morgan’s mandate shifted later in the year, after Laurentian’s financial results came in below analysts’ expectations in the third quarter of 2022. The bank’s stock sunk, wavering around the $30 mark, or less than 60 per cent of book value, compared to Laurentian’s historic average of 90 per cent and the large Canadian banks’ median of 126 per cent. At these valuations, it became difficult for Laurentian to raise capital for acquisitions.
In the months that followed, the valuations of regional lenders such as Laurentian were impacted by the failure of California’s Silicon Valley Bank and other midtier U.S. lenders. At this point, two of the sources said, the Laurentian board asked JP Morgan to consider all options for increasing shareholder value, including the sale of the bank.
Laurentian’s share price jumped above $40 in mid-July after the bank confirmed it was in the midst of a strategic review.
A takeover of the lender would offer the purchaser expansion opportunities in retail and commercial banking in Quebec and Ontario. Laurentian also operates a U.S. commercial financing business, Northpoint Commercial Finance, which has been its fastest-growing division and has been the target of previous expressions of interest from acquirers.
But among the pool of potential bidders for Laurentian, few seem set to buy. In contrast to the Canadian arm of HSBC Holdings plc, which attracted interest from all the major banks when it went up for sale this past fall, Laurentian has relatively few wealthy retail clients and major corporate relationships – the kinds of customers other banks covet. In a report that looked at all possible bidders, Scotiabank analyst Meny Grauman said, “We believe the strategic rationale for acquiring Laurentian is not very strong.”
Laurentian Bank’s return on equity – an industry metric that measures profitability – has been stuck below 10 per cent, far lower than its competitors. At a time when share price valuations are already under pressure, with rising regulatory scrutiny and narrower profit margins, taking on a business in need of a revamp is a tall order.
Royal Bank of Canada is focused on its proposed $13.5-billion acquisition of HSBC Canada, making it an unlikely suitor. Canadian Imperial Bank of Commerce is working on building its capital reserves and has little flexibility to spend money on acquisitions.
Quebec-based lenders National Bank of Canada and Desjardins Group could strike a deal, but National Bank executives have said they plan to invest in growing their operations outside of Quebec.
While Bank of Montreal has been growing its commercial business and U.S. operations, it is focused on integrating its US$16.3-billion takeover of California-based Bank of the West.