Laurentian Bank of Canada slashed its dividend by 40 per cent on Friday after a sharp drop in profit, becoming the first large Canadian bank to cut its payout in nearly 30 years.
The Montreal-based bank came into the COVID-19 crisis on a back foot, having struggled in recent years with wage disputes and a challenging transition toward digital banking that has seen it shutter many branches and phase out teller services.
“When we started the year, I had high degree of confidence that 2020 would be a year in which we would return to growth and that the heavy lifting would come to an end. Recent events have certainly changed the timetable but not our resolve,” chief executive François Desjardins said Friday on a conference call with analysts.
Canada’s seventh largest bank reported a 79-per-cent drop in profit for the three months ended April 30, with net income falling to $8.9-million from $43.3-million in the same quarter last year. The decline was largely attributed to a spike in provisions for potential loan losses tied to weakening economic conditions.
Laurentian responded by cutting its quarterly dividend to 40 cents a share, down from 67 cents. This is the first time a large Canadian bank has cut its dividend since National Bank of Canada did so in 1992, according to data from Refinitiv.
Mr. Desjardins said the dividend cut was a prudent move, taken “instead of trying to earn our way out” of the crisis. “As earnings go back to what they should be [after the bank’s planned strategic transformation] … then the dividend would grow along with it,” he said.
Some analysts who cover the bank say the cut may not have gone far enough.
"In a normal environment, we would view this payout as easily sustainable. But we are not in a normal environment and believe the dividend overhang could persist,” National Bank analyst Gabriel Dechaine wrote in a note to clients.
The results were worse than analysts had anticipated. Laurentian reported adjusted per-share earnings of 20 cents, well below the 38-cent average that analysts had expected, according to Refinitiv data. The price of Laurentian shares fell 9.14 per cent on Friday.
The bank’s earnings cap off a week of dismal results from Canadian banks, which saw profits eviscerated by a rise in loan-loss provisions due to expectations of future defaults and weakening credit.
Laurentian, a regional bank that focuses primarily on Quebec, managed to keep revenues flat on a year-over-year basis, but higher provisions slammed its bottom line. In an attempt to reduce expenses, it laid off 200 employees, around half after the quarter end.
Laurentian recorded $54.9-million in provisions for credit losses, compared with $9.2-million a year ago. Gross impaired loans, which are loans that the bank does not expect to be paid back in full, rose to $235-million, up 25.8 per cent year-over-year.
The biggest increase in loan impairment came from the bank’s commercial loan book, where gross impaired loans rose 42 per cent year-over-year. Executives were asked several times on the call about where those impairments were concentrated, but declined to offer specifics.
“If you were weak or were facing some challenges going into this, then the impact of COVID has really highlighted and pushed them over the edge,” Liam Mason, the bank’s chief risk officer, said on the call.
The bank’s capital position deteriorated slightly in the quarter, with the closely watched common equity Tier 1 ratio falling to 8.8 per cent from 9 per cent. The bank said it now expects its capital levels ”will remain below the level observed over the recent quarters.”
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