LB Outlook Negative, Says S&P

Standard & Poor’s has announced:

    •We believe Montreal-based Laurentian Bank of Canada’s funding metrics have weakened, as reliance on unsecured wholesale funding has increased because loan growth has accelerated in the past couple of years more than for peers.

  • •We are revising our outlook on Laurentian Bank to negative from stable, to account for the bank’s higher dependence on short-term wholesale funding (as we define it), which we view as a riskier and less-reliable funding source.
  • •The negative outlook also reflects the potential risks we believe could materialize from the bank’s aggressive business growth (both organic and acquisitive), particularly in Business Services, which includes specialty lending to commercial segments such as equipment finance as well as lending to small- and medium-size enterprises (SMEs) and B2B Bank, its broker and third-party advisor channel, in the next two years.
  • •We are also affirming our ‘BBB/A-2’ long- and short-term issuer credit ratings on Laurentian Bank.

“The outlook revision reflects our assessment of the bank’s weakening funding metrics due to management’s increased appetite for unsecured wholesale funding, with a higher emphasis on short-term wholesale funding (as we define it), which we view as a riskier and less reliable funding source” said Michael Leizerovich S&P Global Ratings credit analyst. By our calculation, Laurentian Bank’s short-term wholesale percentage of funding base has meaningfully risen from 14.6% at year-end 2012 to 25.4% at first-quarter 2017 (versus the peer average of 23.8%). As of first-quarter 2017, the bank’s stable funding ratio (which measures the company’s ability to fund long-term assets with long-term funding) was about 87.8%, which is below the Canadian bank peer average of 98.0%. By our estimate, this ratio, which was 95.4% at year-end 2013, has steadily declined for several years as the company has sought to diversify its funding sources to fund its loan growth.

The outlook is negative, reflecting the bank’s weakening funding profile and heightened risks associated with aggressive business growth. We will continue monitoring the bank’s progress against its ambitious seven-year transformation plan and remain vigilant regarding any changes in asset performance.

Affected issues are LB.PR.F, LB.PR.H and LB.PR.J.

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