LB.PR.D & LB.PR.E Upgraded to Pfd-3(high) by DBRS

DBRS has announced it:

has today upgraded the Deposits & Senior Debt rating of Laurentian Bank of Canada (Laurentian, LB or the Bank) to BBB (high), the Subordinated Debt to BBB and the Short-Term Instruments to R-1 (low) from BBB, BBB (low) and R-2 (high), respectively; all the trends are Stable.

The rating upgrades reflect the progress LB has made in improving its sustainable internal capital generation through improvement in its earnings profile. DBRS believes LB’s strategy to focus on its three core segments (Retail & SME Québec, B2B Trust and Real Estate & Commercial) and its improved operating efficiency have been instrumental in increasing the quality of earnings over the last several years. A more clearly defined target market, investment in technology, strengthened relations with its unionized workforce and incentive compensation programs contributed to this improvement.

The core strategy is expected to deliver further improvements in return on equity (ROE) and internal capital generation in the intermediate term, although these improvements will likely be hampered in the near term by the slowing regional economy and difficult operating environment for banks in general.

Over the longer term, material improvements in efficiency are required to eliminate the Bank’s competitive disadvantage in its cost structure. Further efficiency improvements are targeted by increasing revenues while holding expense growth to lower levels, which DBRS views as an appropriate strategy. Working with the unionized workforce and improving the sales culture of the organization are integral to this goal.

B2B Trust has been (and is expected to continue to be) a positive factor in Laurentian’s credit profile in terms of its contribution to profitability, as well as the beneficial effect it has on both business line and geographic diversification.

Under DBRS’s global rating methodology for banks, Laurentian’s long-term Deposits & 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 adjusted ROE and internal capital generation in the first half of 2008 of 10.9% and 7.1%, respectively. While still comparatively low and assisted by an outsized securitization gain, these results are the highest in the past six years. Relative to other Canadian banks, LB has benefited from its higher proportion of retail deposit funding over the past nine months of credit market instability. Asset quality has remained strong.

While not mentioned in the text of the press release, the summary shows the preferreds being upgraded to Pfd-3(high).

This is a welcome change in direction for the bank’s ratings:

DBRS Ratings for LB
From To Rating
2001-11-08 2003-12-15 Pfd-2(low)
2003-12-16 2004-10-7 Pfd-3(high)
2004-10-8 2008-6-11 Pfd-3
2008-6-12 ? Pfd-3(high)

Update: The preferreds continue to be rated P-3(high) by S&P, while the credit rating is BBB with a positive trend.

Update: See also previous commentary for LB.PR.D and LB.PR.E

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