Despite reporting an 16% second quarter earnings slide this week, Desjardins Securities raised the Laurentian Bank of Canada (OTCPK:LRCDF) shares to a ‘buy’ Friday.
Michael Goldberg, Desjardins Securities analyst, said in a note to clients:
With earnings that disappointed the Street, continuing margin compression and signs that securitization can no longer be an engine of earnings growth, [the second quarter] results contained little good news.
But, there is good news in the environment surrounding Laurentian. Most importantly, this environment is enabling banks, including Laurentian, to reprice loans and deposits, adding a new source to Laurentian’s expected earnings growth.
Since the start of the current fiscal year, and in particular during the second quarter, Laurentian began repricing its loan and deposit rates, starting with its “High Interest Investment Account.”
The Montreal bank had been offering 3.5% for deposits – one of the highest in the industry, Mr. Goldberg noted. However, from early March through to the end of April it gradually reduced the rate paid on this account to 1.25%, which could potentially save the bank C$47-million this year if it manages to maintain its C$2.1-billion balances, he added.
Laurentian has also increased pricing by 1% on its personal lines of credit and home equity lines of credit, and has been increasing rates on commercial loans.
Mr. Goldberg said:
Of the Canadian banks, Laurentian is relatively simple and does not have the complexities of large wholesale operations. The impact of falling interest rates and higher deposit costs in the past year has been a serious negative to [net interest margins], but it is also easier to observe the connection of its recent repricing actions (which are not unique to Laurentian) with the probable widening of NIM going forward.
He noted that management seems confident its net interest margin has bottomed and is looking to gradually improve upon it in future earnings. Mr. Goldberg raised Laurentian’s shares to a “buy” but maintained his C$36 price target, accordingly.