DBRS Confirms Laurentian Bank at BBB (high) and R-1 (low)

DBRS has today confirmed all ratings of Laurentian Bank of Canada (Laurentian or the Bank), including the deposits and senior debt at BBB (high) and the short-term instruments at R-1 (low); all trends remain Stable.

The ratings are supported by Laurentian’s overall business risk profile, which is conservative relative to the larger banks in Canada, with a focus on retail lending funded by retail deposits and an absence of significant involvement in higher-risk wholesale or international strategies. Laurentian’s underlying asset quality profile has strengthened over the past several years as the loan mix shifted to a greater proportion of secured lending. Limitations on the ratings include a modest return on equity and high cost structure. Regional concentration in Québec, while still a potential rating challenge, was beneficial through the downturn as the economic performance of the province was resilient.

Laurentian’s long-term deposit and senior debt rating has an intrinsic assessment of BBB (high) and a support assessment of SA3. The SA3 rating, which reflects the expectation of no timely external support, results in the final rating being equivalent to the intrinsic assessment.

Laurentian reported a profit of $98.9 million for the first nine months of 2011, an increase of 9.4% from the comparative period in 2010, largely driven by higher securitization income and lower loan loss provisions, and partially offset by higher non-interest expense. The return on equity (ROE), at 11.6%, was up modestly. Asset-quality metrics have begun to recover from the downturn, and adjusted internal capital generation has been stable at 7.9% for the full year 2010 and the first three quarters of 2011, up materially from the low of negative 1.2% in 2004.

On September 2, 2011, Laurentian announced the proposed acquisition of the MRS group of companies (MRS) from Mackenzie Financial Corporation (Mackenzie). MRS consists of M.R.S. Trust Company and three carrying dealers that provide trust and administrative services to firms regulated by the Ontario Securities Commission (OSC), the Mutual Fund Dealers Association (MFDA), the Investment Industry Regulatory Organization of Canada (IIROC) and the Autorité des marchés financiers (AMF), respectively. The intention is to merge the acquired businesses, which have particular strengths in the self-directed registered retirement savings plan (RRSP) area, with B2B Trust.

In addition, the Bank also announced a distribution relationship with Mackenzie, which DBRS views as a modestly beneficial move for the Bank. This is a significant acquisition for Laurentian; at $165 million (including $50 million in goodwill), the purchase price is 15.6% of the Bank’s common equity. In addition, Laurentian will repay $20 million in subordinated indebtedness to Mackenzie. The proposed acquisition is expected to close in November 2011.

While DBRS views the proposed MRS acquisition as consistent with Laurentian’s strategy (it expands the wealth management operation and increases fee income, both of which could be beneficial to the rating over time), it is not without risks, particularly integration risk given that the Bank has not made a major acquisition for some time. Management expects the acquisition to be modestly accretive in 2012 and more so in 2013 as a result of synergies related to scale. Integration costs are expected to be $25 million plus additional IT investments of $13 million (both before tax).

Notes:

The Cumulative Preferred Shares rating is notional as there are no outstanding shares.

All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (January 14, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009) and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on the DBRS website under Methodologies.