Laurentian Bank’s profitability deteriorated a little less than analysts expected during the months of May, June and July. But it wasn’t enough Friday to convince investors that a turnaround is taking place within the organization.
Laurentian shares lost 4% of their value during the last session of the week to close at $25.81 on the Toronto Stock Exchange. The stock is now trading at a 55% discount to its book value of $56.97 at the beginning of August.
An analyst asked management during a conference call Friday ahead of the earnings call whether the bank plans to buy back shares for cancellation given the current market valuation.
Executives responded that it was a capital allocation decision. The bank prefers to hold onto its capital to make it available to commercial clients for equipment financing, for example, or to real estate developers waiting for rates to fall further before launching or restarting projects.
The Montreal financial institution generated net profits of $34 million during the quarter, down about 30% year-on-year.
Adjusted for certain exceptional items, profit per share reached 88 cents for the quarter, while analysts expected 86 cents.
A restructuring charge of 9 million is included in the quarter’s results, in particular linked to the severance pay paid to employees made redundant in May, a decision affecting around fifty people (around 2% of the workforce).
Provisions for credit losses were $16.3 million for the quarter, up from $13.3 million a year ago but down from $17.9 million in the prior quarter.
Provisions for impaired loans rose to $28.1 million, up $14.7 million from a year earlier. The increase raises questions about future credit losses, according to CIBC analyst Paul Holden.
Sunnier days are still a long way off. Credit trends are not very good, which adds pressure to a bank whose profitability is already weak.
CIBC analyst Paul Holden said in a report released Friday
The expert said he expects the discount on the stock to remain in place until the bank can improve its return on equity.
“Work to be done”
“Despite the macroeconomic challenges, our strong equity position and our strategic investments pave the way for future growth,” commented Laurentian CEO Éric Provost.
PHOTO FRANÇOIS ROY, LA PRESSE ARCHIVES
Laurentian CEO Eric Provost
We are resolutely committed to executing our plan and creating an effective organization that drives long-term value and benefits for our customers and all stakeholders.
Éric Provost, CEO of Laurentian
“Despite the slightly better-than-expected performance, the bank’s results show that there is still work to be done,” said analyst Meny Grauman of Scotia.
“There is no doubt that the bank needs to invest in technology, but the problem is that revenues continue to be under pressure due to falling loan levels,” he says.
“Overall, Laurentian appears to be doing what it needs to do at this point, but its recovery remains fraught with challenges and continues to be a story to follow.”
In the eyes of Paul Holden of CIBC, nothing in the performance revealed on Friday yet indicates a turnaround at Laurentian.
The bank is still in the early stages of its renewed strategic plan unveiled in late May. The bank’s driving force continues to be commercial banking, which includes equipment and inventory financing, financing residential, commercial and industrial projects from developers and real estate contractors, and commercial lending to small and medium-sized businesses.
The plan aims to generate over a three to five year horizon an adjusted earnings per share growth of greater than 10%, an adjusted return on equity of greater than 10%, and an adjusted efficiency ratio of less than or equal to 60%.
In mid-August, management announced the sale of assets under management of the Discount Brokerage division of Laurentian Bank Securities to CI Financial.