After more than five years of renovations, setbacks and constant change, Laurentian Bank of Canada was looking forward to a smoother year in 2020. Then came COVID-19.
Instead of finishing the final stages of a huge project to swap out Laurentian’s core banking system for tracking accounts and transactions, staff were suddenly consumed with a mass shift to remote working, rapidly deploying relief for clients who lost income, and making branches safe to visit.
More than any other large Canadian bank, Montreal-based Laurentian needed some good news. Through 2018 and some of 2019, the country’s seventh-largest lender grappled with labour strife over union contracts as well as a large internal review into documentation gaps in its mortgage book. The bank shuttered nearly half of its branches at the same time it rebuilt its core systems and digital banking platform from the ground up as part of an ambitious seven-year plan that started in 2015.
One by one, Laurentian has cleared these hurdles, and is starting to see early rewards from its digital revamp. But the fallout from the novel coronavirus swallowed most of the bank’s fiscal second-quarter profit, which dipped to $8.9-million, from $43.3-million a year earlier. And once again, chief executive François Desjardins says he hopes next year will be different.
“It hasn’t changed the end goal. I think the end goal is still the same. But obviously a global pandemic was not in the cards,” Mr. Desjardins said.
A 40-per-cent cut to the bank’s quarterly dividend – the first such reduction by a Canadian bank since 1992 – also wasn’t part of the plan. The decision to preserve capital appears to have pleased almost no one, as shareholders brace for lower payouts while banking analysts suggested the dividend may not have been reduced enough.
Laurentian’s leaders chose to slash the dividend out of “an abundance of caution," Mr. Desjardins said. He expects payouts will rise again in step with the bank’s earnings as the pandemic eases, but said the lender needs financial flexibility until then.
“We don’t have a crystal ball in terms of if COVID is going to get better, or if it’s going to drag on," he said. “If we thought that we needed to do a bigger cut, we would have. When you do something like this, you don’t do it twice in a row."
A plan to complete the bank’s switch to a modern, more cost-efficient core banking system has been delayed and won’t finish before the end of 2021. The old systems – which are currently run side by side with their new replacements, by two technology teams – will be retired in 2022.
But the heavy lifting done so far made Laurentian far better prepared to cope with the pandemic. Many more of its customers bank online, and electronic payments have increased even as overall transactions dropped. Laurentian reduced its network of branches – the bank calls them “financial clinics” – from 150 to 83, eliminating most over-the-counter transactions such as cash withdrawals.
“Looking back, that was a great idea. Because as we hit COVID-19, the customers had already shifted to other means, electronic means or ATMs," Mr. Desjardins said. The remaining branches now average about 10 visits a day in most locations.
Like all major banks, Laurentian’s provisions for credit losses – the funds banks set aside to cover loans that may need to be written off – spiked sharply to $54.9-million, compared with $9.2-million a year ago. At 0.66 per cent of total loans, however, its ratio of expected losses is only about half as high as at Canada’s Big Six banks. And Laurentian has barely any exposure to industries such as oil and gas or airlines that have been battered most by the novel coronavirus, Mr. Desjardins said.
Laurentian also has excess capital to absorb potential losses and continue spending on its transformation plan, with a common equity Tier 1 (CET1) ratio of 8.8 per cent – higher than the bank’s target range of 8.1 per cent to 8.5 per cent.
Faced with another challenging year, Mr. Desjardins is trying to keep a longer-term perspective and says he hopes investors will stay patient. Laurentian is celebrating its 175th year, which serves as a reminder of the crises, wars and severe economic downturns it has weathered before.
“It’s not by making silly decisions that you get to be this old. It’s by making prudent decisions," he said. “I’m saying to my team, this bank has gone through 175 years of this.”
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