LB : CreditWatch Negative, says S&P

S&P Global Ratings has announced:

  • •Montreal-based Laurentian Bank of Canada recently disclosed mortgage documentation and client representation issues, with a sample of mortgage loans sold to third-party purchasers, that have generated some concern, on our part, with respect to the rigor of the company’s underwriting procedures and risk control functions.
  • •While there is currently no evidence of weakened asset quality in the sample or overall mortgage portfolio, we believe aggressive residential loan growth as well as the bank’s exposure to the nonprime residential mortgage segment of the Canadian mortgage market has increased the near-term downside to the risk profile for Laurentian Bank.
  • •We are therefore placing our ratings on Laurentian Bank of Canada on CreditWatch with negative implications.

The CreditWatch placement reflects our view that the bank’s aggressive loan growth could have negative repercussions for LBC’s creditworthiness. Although the bank’s asset-quality metrics remain strong, we believe the recent disclosures around lapses in mortgage documentation based on a sample of mortgages sold to a third-party purchaser (TPP) and inadvertent inclusion of ineligible loans in another third-party transaction suggest the company’s underwriting procedures and risk control functions may be weaker than the assumptions our current ratings incorporate.

As noted in our June 16 report on the bank, we believe that LBC’s ambitious transformation plan, largely focused on growth in commercial lending and increased use of the B2B (via brokers and third-party financial advisers) channel, may negatively affect the bank’s asset-quality profile. In 2017, LBC’s residential mortgage loans were up 10% from last year, reflecting organic growth through independent brokers and advisors.

Specifically, we could lower our ratings on LBC if we see:

  • •Further findings regarding mortgage document falsification that show the problem to be deeper than initially described;
  • •Weakening funding and liquidity profile, such that our stable funding ratio and broad liquid assets as a proportion of short-term wholesale funding for Laurentian Bank meaningfully weaken;
  • •Deterioration in loan performance and asset quality metrics owing to the aforementioned documentation issues or otherwise; or
  • •Legal or regulatory actions affecting the company’s financials or reputation.

We could affirm the ratings, and revise the outlook to negative, if we observe receding near-term risks, including:

  • •The mortgage document falsification proves to be small in impact and largely contained to a minor segment of the portfolio.

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

This move follows coverage by Canadian media:

Laurentian Bank of Canada is trying to calm jittery investors, suggesting shareholders overreacted when they sent its share price tumbling after the bank disclosed problems with some mortgages it issued.

The Montreal-based bank played down documentation gaps and misrepresentation affecting up to $300-million in mortgages as largely a paperwork issue, even as it admitted staff had failed to get necessary documents to verify some loans, while a lesser number of clients had embellished their means to qualify.

Executives at the lender have stressed that it has ample excess cash to repurchase $180-million in problematic loans in the near term, and more if necessary. Audits turned up no evidence that staff did anything intentionally wrong, and found no notable concentration of improper loans coming from any particular mortgage brokers, the bank said. And so far, the loans at issue have performed well.

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