Laurentian must find a path to growth as it announces decision to remain a stand-alone bank

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Laurentian Bank of Canada LB-T is faced with the challenge of rebuilding confidence among investors and proving that it can revive its business after ending a months-long search for a buyer.

The Montreal-based bank concluded a lengthy strategic review on Thursday, saying that no buyer emerged and it will continue with an accelerated version of a turnaround plan that it set out on nearly two years ago. The bank also shuffled its leadership team as part of a simplification strategy, with two senior executives leaving the lender, and said it plans to unveil a revised strategic plan early next year.

The sale offered rivals a rare opportunity to buy a Canadian bank and expand its customer base in a highly saturated market in which customers tend to avoid switching lenders. But no attractive bids materialized as competing big banks focus on their own growth plans while higher capital constraints hinder their ability to strike deals.

Now investors must wait until 2024 for more details on Laurentian’s growth plans, while analysts are critical of the path forward, saying that decluttering its operations may fall short of expectations.

“We are unsure at this stage that focusing on efficiency and simplification to drive growth will be enough to placate the market,” Barclays analyst John Aiken said in a note to clients.

Laurentian’s share price slumped 13 per cent Thursday to $31.40 on news the review had concluded without the bank striking a deal. In July, when The Globe and Mail first reported the bank had launched a strategic review, Laurentian stock soared to $43.

When the news about the sale broke in July, Laurentian Bank was at the halfway point of a three-year strategic plan to revamp its business launched by new chief executive officer Rania Llewellyn, who took the helm in 2020, becoming the first woman to lead a major Canadian bank. Her appointment came after the bank posted years of lacklustre stock performance and weak financial results that prompted it to slash its dividend.

While the lender has bolstered its digital banking operations and pared back its businesses to focus on specialized niches, it had yet to prove its new strategy could help it compete with larger rivals. With a weak deposit base and dampened loan growth, Laurentian has posted stunted profits over the past year.

With a sale scuttled, Laurentian is turning its focus to accelerating its three-year turnaround plan with a revised strategy expected early next year.

“Having now completed this review of our strategic options, we are more confident than ever in Laurentian Bank’s strong positioning in the market and unique offering for our customers,” Ms. Llewellyn said in a statement.

“As we continue to evolve our bank, our executive management team and all employees will build on our proven track record of executing against our plan and delivering meaningful results for our customers, shareholders, and stakeholders.”

During the bank’s third-quarter earnings call in late August, Ms. Llewellyn said that since the launch of its turnaround plan, Laurentian has exceeded all of its financial targets “against the backdrop of an increasingly challenging macroeconomic environment and market volatility.”

But the broader banking industry is facing slowing growth while Laurentian grapples with key issues. Dampening loan demand and rising costs are squeezing profits across the industry, while Canada’s banking regulator has been raising capital requirements, forcing the banks to hold onto billions of dollars as a cushion in case the economy turns sour.

In the current phase of its overhaul, Laurentian is also seeking to grow its weaker core deposit base, which is a cheaper source of funding for loans.

“Following completion of the review, investors will be looking for solutions to the current challenges facing the bank,” Raymond James analyst Stephen Boland said in a note to clients. “In the current higher rate environment, we believe it has become increasingly challenging for Laurentian to compete with the big banks in segments such as conventional mortgages given their higher-cost funding mix.”

Laurentian’s return on equity – an industry metric that measures profitability – has been stuck below 10 per cent, significantly lower than its rivals. In the third quarter, ROE slipped to 6.9 per cent from 8.4 per cent in that same quarter a year prior as Laurentian spent more on projects in an attempt to grow its business. That could weigh on the bank’s valuation.

The lender also took a charge of $2.7-million related to the strategic review, as well as $5.5-million in restructuring costs to trim its capital markets business. Analysts expect Laurentian to make more costly cuts to rein in expenses over the long term.

“We expect the bank to record a large restructuring charge to facilitate its path forward,” National Bank analyst Gabriel Dechaine said in a note to clients. He anticipates a $100-million pretax charge in the second quarter of 2024.

On Thursday, Laurentian also announced head of personal banking Karine Abgrall-Teslyk and executive vice-president of operations Yves Denommé have stepped down after less than three years at the bank. Laurentian will operate with a slimmer leadership team as it expands the mandates of two executives to fill the vacancies.

Éric Provost, currently head of commercial banking, will take on the role of group head overseeing personal and commercial banking. Chief human resources officer Sébastien Bélair will add the job of chief administrative officer.

Laurentian launched a strategic review in the spring of 2022, hiring investment bank JPMorgan Chase & Co. as its adviser. Initially, Laurentian focused on expanding by buying a niche finance business in sectors such as commercial lending, or potentially merging with another financial institution, according to two sources familiar with the process. The Globe is not identifying these sources because they are not authorized to speak for the bank.

When Laurentian’s stock price dropped earlier this year, after the release of financial results that fell short of analysts’ expectations, JPMorgan’s mandate expanded to include the potential sale of the bank.

Laurentian Bank faces tepid interest as bid deadline approaches

The country’s ninth-largest bank had launched the review seeking to bolster shareholder returns and had said at the time it was “exceeding” its financial targets in an increasingly challenging macroeconomic environment.

However, in mid-July, The Globe reported that Laurentian was struggling to find an acquirer. Toronto-Dominion Bank TD-T, with billions of dollars in excess capital, and Bank of Nova Scotia BNS-T, whose executives had previously signalled interest in expanding in Quebec, were initially thought to be the top contenders until both bowed out that month.

In 2000, Scotiabank sold 43 branches in Quebec to Laurentian for $35-million. Laurentian had a unionized branch work force for many years, which analysts said was a barrier to a takeover, but decertified the union two years ago.

Meanwhile, Royal Bank of Canada is tied up with approvals for its proposed $13.5-billion takeover of HSBC Canada, the country’s seventh-largest lender. Canadian Imperial Bank of Commerce has said its priority is expanding its existing business as it builds its capital reserves, and National Bank is focused on expanding outside of its base in Quebec. Bank of Montreal has been integrating its purchase of California-based Bank of the West.

On Thursday, 1.6 million shares in Laurentian traded on the Toronto Stock Exchange, more than seven times the average volume. An investment banking source said the spike partly reflected selling by individual shareholders who speculated on a potential takeover, while buyers included value-focused fund managers.

Laurentian’s stock price is currently approximately 60 per cent of the bank’s book value. If a buyer had stepped forward, analysts predicted the bank would fetch its book value of about $2-billion.

“We believe a bid close to this level would have been a requisite for Laurentian board approval,” Mr. Boland said. “Evidently, it may have been simply too high a price to pay.”