Right now, Laurentian Bank of Canada LB-T is a zombie lender.
The Montreal-based bank is shrinking. Its most recent financial results, released last week, showed profits are falling. Its loan book is smaller than it was a year ago and customer deposits are dropping. The only things going up are Laurentian’s costs: The bank’s expenses rose more than analysts had forecast, as it invested in technology in the aftermath of a system outage last fall.
Laurentian chief executive officer Éric Provost has promised to deliver a new strategic vision this spring, aimed at bringing the zombie back to life. Mr. Provost, parachuted into the top job in October, needs to outline and execute on a growth plan, a challenge his predecessors failed to meet.
What’s the plan?
In the short term, Mr. Provost can make a credible case for playing defence. Laurentian’s loan book is smaller than it was a year ago because the bank is being prudent about extending credit to higher-risk clients, such as real estate developers and boat retailers.
When a bank’s loan portfolio shrinks, it needs fewer deposits to balance the books. In recent months, Laurentian intentionally conceded market share in sectors such as term deposits, where customers flock to the institutions offering the highest interest rates.
Prudence, however, isn’t playing well with investors.
After a failed attempt to sell the bank last summer, Laurentian’s stock market valuation is far below that of its rivals and its own historic standard. The bank’s shares are trading at less than half their book value. Shares in the country’s Big Six banks command an average 1.27-per-cent premium to their book values.
Historically, Laurentian’s stock has traded at 90 per cent of its book value. One of the reasons the bank’s board decided not to sell the lender last summer is that none of the potential buyers made an offer that exceeded Laurentian’s book value.
After Laurentian announced its most recent results last Thursday, several analysts downgraded their stock price targets to levels even lower than the current depressed value of the bank’s shares.
Mr. Provost needs to show Laurentian can get back on offense. While the CEO and his executive team are still working on their strategic plan, and asking investors for patience, Laurentian’s boss is starting to drop hints about where the bank sees growth potential.
In recent years, Laurentian’s fastest growing division has been its U.S. lending business, Northpoint Commercial Finance, which it acquired in 2017. Northpoint’s whole business used to consist of teaming up with boat and recreational vehicle dealerships to finance customer purchases.
With Laurentian’s backing, Northpoint branched out into financing construction and agricultural equipment, consumer electronics, manufactured homes, appliances and technology. The company, based in Alpharetta, Ga., has taken the seasonality out of its business. At the end of January, Northpoint had $4.3-billion of loans, compared with $4.8-billion a year ago.
Laurentian must find a path to growth as it announces decision to remain a stand-alone bank
At a recent investor conference, staged by RBC Capital Markets, an audience member asked Mr. Provost if Laurentian would consider selling Northpoint to free up capital that could be used to expand Canadian operations. Mr. Provost went out of his way to explain why the bank is going in the opposite direction.
He said Northpoint is consistently driving growth, even as Laurentian struggles to find places to expand in its home market. He said the question for Laurentian is “can we partner up” at Northpoint to enter new markets, and add capital. Mr. Provost also said Northpoint is working on opportunities to “white label” more of its loans, backstopping vendors in new sectors by providing credit to their customers.
The Street is taking a show-me approach on Laurentian. After the failed sales process, turnover in the executive suite and last fall’s technology issues – clients couldn’t access their accounts for the better part of a week – the bank’s valuation reflects a lender with limited growth potential.
This spring, Mr. Provost is going to need to flip the script. Based on the material the CEO has tried out with audiences recently, his pitch will focus on building Northpoint’s U.S. lending platform.
If Laurentian can execute on a growth strategy, a moribund stock will take flight. If the plan fails, the bank’s board may once again be forced to consider takeover offers at less than Laurentian’s book value.