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DBRS has announced:

DBRS Limited (DBRS Morningstar) confirmed the ratings of Laurentian Bank of Canada (LBC or the Bank), including the Bank’s Long-Term Issuer Rating at A (low) and its Short-Term Issuer Rating at R-1 (low). DBRS Morningstar changed the trends for all long-term ratings to Negative from Stable. All short-term ratings have a Stable trend. The Bank’s Intrinsic Assessment of A (low) and Support Assessment (SA) of SA3 are unchanged. The SA3 designation, which reflects no expectation of timely external support, results in the final rating being equivalent to the Intrinsic Assessment.

KEY RATING CONSIDERATIONS
The Negative trend reflects the wide and growing scale of the economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic, which pressured LBC’s Q2 2020 earnings and will negatively affect earnings and asset quality in future quarters. Nevertheless, unprecedented support measures have been put in place through monetary and fiscal stimuli, which in DBRS Morningstar’s view, could help to mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, additional ratings pressure may occur.

The rating confirmations reflect LBC’s solid regional retail franchise in Québec and its growing national reach through B2B Bank, its commercial Business Services segment, and its online platform LBC Digital. Furthermore, the ratings are supported by LBC’s conservative credit culture and sound balance sheet fundamentals. The ratings also consider LBC’s relatively higher proportion of brokered deposits; its increasing, albeit temporary, operating expenses; as well as its weaker capital position relative to peers.

RATING DRIVERS
Given the Negative trend, an upgrade is unlikely. The trend would revert to Stable if the economic fallout from the coronavirus pandemic is not prolonged and outsized credit losses do not materialize.

Conversely, a material deterioration in loan performance, which results in a significant increase in loan losses because of longer-than-expected adverse coronavirus-related impacts, would lead to a ratings downgrade. Additionally, a reduction in capitalization to levels closer to regulatory minimums would pressure the ratings.
…
LBC’s earnings were affected from significantly higher provisions for credit losses (PCL) because of the economic impact of the coronavirus pandemic. As a result, the Bank reported Q2 2020 net income of $8.9 million, a year-over-year decline of 79% as it took provisions of $54.9 million, which was a significantly higher amount than the $9.2 million PCL recorded in Q2 2019. The majority of the increase comprised PCL on performing loans reflecting changes in forward-looking macroeconomic indicators relating to the impact of the pandemic; however, LBC’s income before provisions and taxes remained flat from the previous year at $56 million in Q2 2020. DBRS Morningstar notes that, as a result of the Bank’s various transformation initiatives, LBC’s efficiency ratio remains one of the weakest among peers at 76% for Q2 2020. Management expects operating efficiency to improve over the next three years as it begins phasing out older systems and as the Bank begins to benefit from other investments in the franchise.

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

Laurentian Bank recently slashed its common dividend, as reported on May 29.

This entry was posted on Thursday, June 4th, 2020 at 5:11 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.