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Laurentian Bank: Cautious After Q2 2020

Jun. 04, 2020 9:07 AM ETLaurentian Bank of Canada (LRCDF), LB:CA2 Comments
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  • Laurentian's dividend cut wasn't entirely expected but was necessary given the impact of COVID-19 on the bank's credit stance.
  • The low capital flexibility poses sustainability concerns as evidenced with CET1 ratio of 8.8%.
  • Its future dividend payout is at risk and struggles likely not to be over.


With COVID-19 in the spotlight, the earning season for Canadian banks was of particular interest this 2nd quarter. The attention revolved mostly around impairment loans, capital and pandemic-related provisions, which looked material in many instances. More specifically, the earning results of Laurentian Bank of Canada (OTCPK:LRCDF) drew my interest – and not necessarily for the good reasons. Exiting this quarter and with preceding operational issues, I believe that Laurentian could be forced to take additional measures to sustain its financial resilience. In my opinion, there is still value in investing in Canadian banks, not only for their dividend stability but also for their resilience through crisis cycles. Laurentian just doesn't seem to meet that strong enough risk-reward balance. The limited capital absorption capacity and introductory dividend cut look like a warning signal to me and I think investors should think carefully before investing.

Of note, the stock trades on the TSX under the ticker LB. It lost more than 10% of its value post-Q2 before recovering substantially. It was trading close to C$31 on June 3rd, 30% away from the 52-week high.

Source: Bloomberg

The dividend cut may have not been anticipated, I believe it was necessary and probably not the last step

Laurentian reported Q2 net profit of $8.9mios, down almost 80% compared to the same quarter a year earlier. This resulted in a return on equity of 1% against 7.3% the prior year. What really stroke me was Laurentian’s very rare move for a Canadian bank – slashing its dividend payout by 40% to $0.4 per share, way below its previous payout of $0.67 per share. Considering Canadian banks’ defensive and consistent payout policies, including that of Laurentian, this is a significant announcement. Looking at LB’s dividend history up from 1995, I wasn’t able to find the last time Laurentian cut its dividend, if it ever did.

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Comments (2)

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Quick update for those following the bank. Laurentian just announced the retirement of the current CEO, François Desjardins, who will be replaced on an interim basis by Stephane Therrien (P&C business). The transition will be key in turning around the bank's existing challenges. I wouldn't be surprised to see some restructuring announcements (asset sales, dividend adjustment or equity raise) in the upcoming months...
04 Jun. 2020
thanks good to know. I am staying on the sideline.
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