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Laurentian Bank of Canada is a small bank but a big target for short-sellers, who are convinced that a downturn in the Canadian housing market will deliver severe pain. Now may not be the best time to bet against these naysayers.

The Montreal-based bank, whose operations are largely confined to Quebec, delivered its fiscal first-quarter results on Wednesday. And while the results of its Big Bank peers have hardly been stellar, Laurentian’s were abysmal.

Profit fell 33 per cent from the first quarter of 2018. Revenue fell 9 per cent, even as expenses rose 4 per cent.

Its efficiency ratio (which compares expenses with profit; lower is better) surged to 74 per cent, up from 64.8 per cent last year.

“There is A LOT going on at this bank right now. Big layoffs, union negotiations, branch restructurings and more … all against the backdrop of a fundamental re-positioning of the entire strategy. If progress is being made, it is not yet showing up in the results,” Robert Sedran, an analyst at CIBC World Markets, said in a note.

Short-sellers, who bet that stock prices will decline, would have profited handsomely from the bad news: Laurentian’s share price fell 9.8 per cent on Wednesday after the bank released its results. The price fell another 2.46 per cent on Thursday amid further digestion by the market.

The bank has been a favourite of short-sellers this year. Laurentian’s short-interest ratio, which compares the number of shares sold short with the stock’s average daily trading volume, is 11.1, according to Bloomberg – the highest among Canadian banks.

By comparison, Royal Bank of Canada’s short-interest ratio is just 2.5 and Bank of Montreal’s is 3.9. Canadian Imperial Bank of Commerce is the only other bank that comes close to Laurentian, with a short-interest ratio of 9.6.

What distinguishes Laurentian and, to a lesser extent, CIBC? Housing exposure.

Investors who have taken a dislike to Canadian banks in recent years – including Steve Eisman, managing director at Neuberger Berman Group, who predicted the U.S. subprime crisis prior to the meltdown in 2008; and Crescat Capital, an asset-management firm based in Denver – have expressed concerns about Canada’s housing market.

Home prices have soared, particularly in Vancouver and Toronto, and household debt levels hover near record-high levels amid rising borrowing costs, suggesting that bank profits could be walloped during a severe housing downturn.

Canadian banks have different levels of exposure to Canadian housing, though. At RBC, which is diversified across capital markets, wealth management and U.S. private banking, residential mortgages accounted for 18.5 per cent of the bank’s total assets in 2018, which is near the low end among Canadian banks.

At the other end of the spectrum, CIBC’s residential mortgages accounted for 33.8 per cent of the bank’s assets. And Laurentian is even higher: Mortgages accounted for 37 per cent of assets in 2018, and was relatively unchanged in the first quarter.

Short-sellers are expecting bad days ahead. Otavio Costa, global macro markets analyst at Crescat, said in an interview that Canadian bank profits are already struggling for gains amid a challenging economic backdrop.

“If we continue to see falling prices in major markets like Vancouver and Toronto, we think that the banks will be dragged down along with it,” he said in an interview.

Mr. Costa believes Canadian bank stocks could fall as much as 50 per cent from their highs and trade well below book value, using the U.S. housing-market downturn more than a decade ago as a template. He declined to mention which banks Crescat has sold short, but said that the Big Six are all potential targets.

Laurentian, he added, is too illiquid for his firm, which has US$55-million in assets. The bank has just 42 million shares outstanding, compared with more than 1.4 billion shares for RBC, which suggests that Laurentian may be a favourite of smaller investors who are shorting the stock with a similar strategy.

Short-sellers can be wrong, of course: Canada’s subprime mortgage market is not the size of the precarious U.S. market in 2008, and tighter mortgage regulations are already taking air out of the Canadian housing market, easing fears of a sharp decline in prices.

But anyone betting on Laurentian as a cheap stock that has hit rock bottom might want to consider that plenty of other investors believe its vulnerability remains high.