A Laurentian Bank branch in Montreal on June 21, 2016.Paul Chiasson/The Canadian Press
Laurentian Bank of Canada LB-T shares soared 27 per cent Wednesday as investors weighed whether the bank’s sale process will yield an attractive bid for the beleaguered lender, which is in the midst of a major overhaul.
Montreal-based Laurentian Bank confirmed in a press release Tuesday, after a report by The Globe and Mail that the country’s ninth-largest lender is exploring a sale, that it is “conducting a review of strategic options.”
The move came as a surprise to analysts because Laurentian is halfway through a three-year strategic turnaround under chief executive officer Rania Llewellyn, who stepped into the top job in 2020 after its stock price underperformed its peers for years.
“We believed [Laurentian Bank’s] board was committed to a multiyear turnaround effort under CEO Rania Llewellyn,” National Bank of Canada analyst Gabriel Dechaine said in a note to clients. “Nonetheless, a challenging growth outlook for Canadian banks and a stock price that has consistently hovered below book value (and an unsolicited bid) may have forced the Board’s hand.”
Mr. Dechaine said he expects the deal to be valued at $2.6-billion – Laurentian’s book value – which amounts to an 80-per-cent premium to Tuesday’s closing share price.
Laurentian has been discussing the possibility of a deal with several suitors since late June, sources familiar with the matter told The Globe. The bank has hired JPMorgan Chase & Co. and law firm Osler, Hoskin & Harcourt LLP as its advisers. Laurentian is also believed to have received a bid from an undisclosed rival bank.
A takeover of Laurentian Bank would provide a lender with expansion opportunities in Quebec and Ontario, as well as in the southern United States where it has a commercial equipment-financing business. Laurentian has 57 branches and $51-billion of assets, focusing largely on commercial loans – a key area of growth for many of its larger rivals.
While any of the banks could be a potential buyer, some are likelier suitors than others. Bank of Nova Scotia has previously said it is looking to bolster its presence in Quebec and British Columbia.
Scotiabank has also recognized that its reliance on its international division and costlier wholesale funding has weighed on its share price. By folding Laurentian into its domestic business, the earnings contribution from Scotiabank’s Latin America business would fall to 26 per cent from 28 per cent, according to Mr. Dechaine.
Toronto-Dominion Bank is sitting on billions of dollars in excess capital after its deal to acquire Tennessee-based First Horizon Corp. fell through. In its home market, the country’s second-largest lender is targeting significant organic growth in its personal and commercial business. At its investor day in June, it set medium-term targets to boost its residential lending book by 40 per cent and business loans by 35 per cent.
Meanwhile, Royal Bank of Canada is tied up with its pending acquisition of HSBC Canada, while Bank of Montreal is aiming to integrate its takeover of California-based Bank of the West by September. Canadian Imperial Bank of Commerce has said it is focused on building its existing business and its lower capital reserves, and National Bank of Canada is focused on expanding outside of its stronghold in Quebec.
A key stakeholder with an interest in the outcome is the Caisse de dépôt et placement du Québec, which owned an 8.1-per-cent stake in Laurentian as of Dec. 31, according to filings. Unlike other large pension funds, it invests with a dual mandate that includes contributing to Quebec’s economic development. Spokesperson Kate Monfette said Caisse could not comment on the potential sale, but that it “will be following the process closely.”
While Canadian bank deals are rare, this is the third opportunity in the past year for a major lender to expand its domestic reach through a significant acquisition. In November, RBC unveiled its $13.5-billion deal to scoop up HSBC Canada, which would expand its lead over rivals by tens of billions of dollars in loans and deposits. The same month, billionaire financier Stephen Smith struck a $1.7-billion deal to acquire alternative mortgage lender Home Capital Group Inc.
“Canadian banking assets do not come up for sale often, although that seems to have changed more recently,” CIBC analyst Paul Holden said in a note. “We expect there will be interest from the large Canadian banks given that domestic transactions offer relatively low risk financial accretion.”
But Laurentian has yet to remedy key issues in its business. Its return on equity – an industry metric that measures profitability – has hovered below 10 per cent, significantly lower than its rivals. That could weigh on the bank’s valuation and provide a bidder with an opportunity to buy the bank at a discount.
“The bank’s ROE and relative valuation continue to lag the broader group, but have improved from trough levels under the previous management team,” Scotiabank analyst Meny Grauman said in a note. “Current CEO Rania Llewellyn has been on the job for just three years, and we would characterize her tenure as constructive.”
In 2020, after an abrupt leadership change and years of disappointing results at Laurentian, Ms. Llewellyn became CEO, the first female chief executive to head a major Canadian-owned bank. After a year-long review, she launched a turnaround plan that focused on niche specializations and rejigging its digital platforms through partnerships outside the bank, including its mobile banking app launched in late 2021.
In the current phase of its overhaul, Laurentian has been focused on growing its weaker core deposit base, which is a cheaper source of funding for banks – especially at a time when slowing loan demand and rising costs are squeezing profits across the industry.
While commercial lending accounts for about half of Laurentian’s total loan portfolio, 26 per cent of that portion is in commercial real estate. That’s more than double the average 11 per cent of its Big Six bank peers.
Waning demand for office space has sparked concerns over stability in that loan segment, especially as interest rates spike. Many of the big banks have been setting aside more provisions for credit losses – money reserved for potentially bad loans – as risk rises in office lending books. Many of the big banks have been setting aside more provisions for credit losses – money reserved for potentially bad loans – as risk rises in office lending books.
“We believe [Laurentian Bank’s] CRE exposure and potential impact on credit would be top of mind for a potential suitor,” Canaccord Genuity analyst Scott Chan said in a note.
Quebec struck a cautious tone Wednesday when asked about its position on the potential change of control at Laurentian. “We’re following the situation closely but we’ll make no comment on the process under way,” said Claudia Loupret, spokeswoman for Quebec Finance Minister Eric Girard.
The province has not hesitated to act in the past when confronted with a potential change of control for homegrown companies it considers strategic to its economy, including Rona Inc. in 2012 and Transat A.T. Inc. in 2019.
This time, while government officials could work behind the scenes to make sure Quebec financial players give Laurentian a good look, the province might be more reticent to push for a local takeover of the bank. In part, that’s because Laurentian is a highly Montreal-centric lender with limited emotional connection to Quebeckers outside the city, says Louis Hébert, a specialist in mergers and acquisitions at Montreal’s HEC business school.
“This is not Bombardier or Desjardins Group or even the Cirque [du Soleil],” said Mr. Hébert. “Go 50 kilometres outside the island of Montreal and most people won’t even know Laurentian.”
With a report from James Bradshaw and Nicolas Van Praet