The Laurentian Bank headquarters in Montreal.Ryan Remiorz/The Canadian Press
In the early 1900s, a predecessor to Laurentian Bank of Canada rolled out an inspired marketing campaign.
The Montreal City and District Savings Bank (the lender rebranded in 1987) gave kids chrome-plated metal piggy banks. The genius behind the brick-sized box: It was locked, and children had to take their coins to bank to get the key. For multiple generations of Quebeckers, the sturdy piggy banks were an introduction to saving and a cultural touchstone.
Laurentian LB-T chief executive officer Rania Llewellyn will need to roll out another, equally inspired marketing initiative if the bank concludes its current strategic review without finding a buyer willing to pay a premium price for the country’s ninth-largest lender. As Laurentian prepares to release third-quarter financial results on Aug. 31, and potentially update investors on the review, analysts say without a deal, the bank’s growth prospects are dim.
Ms. Llewellyn is almost two years into a three-year turnaround plan that has Laurentian focused on a handful of niche commercial banking markets – real estate lending, small-to-medium sized business loans, equipment and inventory financing.
The strategy has failed to inspire the Street, and contributed to Laurentian’s decision to launch the review. In a recent report, analyst John Aiken at Barclays Capital said: “We wonder if the efforts to explore potential growth options implies that, to a certain degree, management may not believe that the current strategy will be able to deliver the results that could propel Laurentian’s valuation.”
In a recent preview of Laurentian’s results, RBC Capital Markets analyst Darko Mihelic forecast that over the next two years, the bank’s earnings per share will grow by an anemic 4 per cent annually. He predicted that through to 2025, Laurentian’s return on equity will remain at current levels of around 8.5 per cent, well below that of larger peers.
Laurentian’s relatively weak growth is a persistent issue. The bank recruited Ms. Llewellyn from Bank of Nova Scotia BNS-T in 2020 after her predecessor failed to pump up profitability. Even after a recent spike in the bank’s stock price, following the bank’s confirmation of reporting by The Globe and Mail on the review process, Laurentian shares trade at just 67 per cent of the lender’s book value, well below historic levels for the bank, and far less than the value of other Canadian bank stocks, which trade at a median of 137 per cent of their book value.
Selling the bank is the easy way to solve Laurentian’s strategic struggles. However, if no bidder makes a compelling offer, Ms. Llewellyn needs a backup plan. And in a digital age, she can’t go back to chrome piggy banks, even if a mint version of the antique now fetches $175 on eBay.
In the recent past, numerous companies have run strategic reviews, got investors all excited about a potential sale and then announced they were sticking to the status quo. In these situations, CEOs have consistently offered up some sort of sugar to help the medicine go down.
Renewable energy producer Northland Power Inc., for example, ran a strategic review in 2015 when its founder wanted to exit. When no buyer emerged, the company shut down the process, but announced foreign expansion. The stock price doubled over the next five years.
At Laurentian, investor-friendly moves in the wake of a failed sales process could include increasing the common share dividend – Mr. Mihelic predicted a hike is coming at the end of the month – and buying back stock.
Ms. Llewellyn could announce Laurentian is exiting some of its least profitable and most competitive lines of business, such as its capital markets business.
The bank also could announce it is open to selling its U.S. lending business, Northpoint Commercial Finance, though parting with one of its most profitable units would create as many problems as it solves.
Hedge funds that bought into Laurentian in recent weeks on the prospect of a takeover are going to be disappointed with anything less than a sale of the bank. Ms. Llewellyn will never be able to please these investors. However, tangible signs that Laurentian’s turnaround is working, including a sizable dividend boost, will help keep long-term, value-oriented investors onside.