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Laurentian Bank recently announced that its chief executive officer, Rania Llewellyn – the key figure responsible for correcting years of dismal profitability and efficiency, culminating in a dividend cut in 2020 – has left after just three years on the job.Christinne Muschi/Reuters

Laurentian Bank LB-T delivered a big disappointment to investors Monday, at a time when sentiment toward the Montreal-based lender is already frayed. It’s a small consolation, but perhaps investors have a problem with all banks.

To be sure, Laurentian is struggling with a few issues that appear to be of its own making.

It failed to attract a buyer after putting itself on the block in July. It suffered a customer-service outage last week during planned IT maintenance, which could undermine customer loyalty.

The latest: The bank announced that its chief executive officer, Rania Llewellyn – the key figure responsible for correcting years of dismal profitability and efficiency, culminating in a dividend cut in 2020 – has left after just three years on the job.

Predictably, investors aren’t taking the leadership setback well. The share price fell 5.9 per cent Monday. The stock is down about 40 per cent from its intraday high on July 12, when investors were initially ecstatic about the bank’s potential value as a takeover target.

Yes, it’s fair to point to Laurentian as a risky stock that may be immune to arguments that it is cheap relative to banking competitors and its own historical performance.

However, look around at the banking sector and you will see a pile of bad news weighing on lenders that are many times the size of Laurentian, suggesting the bank’s troubles may be part of a broader maelstrom.

Royal Bank of Canada said Friday that it had injected capital into City National Bank, the Los Angeles-based lender it acquired in 2015 to expand its footprint in the United States. The move raises concerns that City National may be caught in this year’s regional banking crisis, which has ensnared some U.S. lenders with deposit outflows and losses on their bond portfolios.

RBC’s share price has fallen 8.4 per cent this year, which is only slightly better than Laurentian’s year-to-date decline of 10.9 per cent.

Canadian Imperial Bank of Commerce set aside $736-million last quarter to cover potential bad loans, a surprisingly large provision that underscored the sector’s exposure to loan losses amid rising borrowing costs and a downturn in commercial real estate.

And Bank of Nova Scotia is attempting to refresh its strategy under new leadership, after its share price underperformed Canadian banking peers for several years. Its share price is down 9.8 per cent this year.

Large U.S. banks aren’t faring any better. The KBW Nasdaq Bank Index of 24 lenders has fallen 24 per cent so far in 2023, underperforming the S&P 500 by more than 35 percentage points.

Rising borrowing costs are forcing lenders to book higher provisions against credit losses. Stubbornly high inflation is raising expenses. And the failure of three regional banks earlier this year has doused investor enthusiasm for the sector.

According to Gerard Cassidy, an analyst at RBC Capital Markets, the top 20 U.S. bank stocks trade at just 8.1 times estimated 2023 earnings, down from 12.5 times estimated earnings in 2017 and 2018.

This low valuation takes into account the expectation that bank profits are heading down. Mr. Cassidy estimates that U.S. bank earnings in the fiscal third quarter will fall 17 per cent, on average, year-over-year.

Nonetheless, he thinks that if the U.S. Federal Reserve’s rate hikes are nearly over, and if the U.S. avoids a deep recession next year, investors should own bank stocks.

Laurentian, of course, is no JPMorgan Chase & Co. or Bank of America Corp. – diversified U.S. behemoths that are too big to fail. Nor is it on the same level as one of the Big Six Canadian banks.

But if Laurentian’s challenges are reflected in its stock, then the small lender is in good company: It is tracking most other banks this year, as investors turn fearful of economic clouds on the horizon.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 04/03/24 4:00pm EST.

SymbolName% changeLast
LB-T
Laurentian Bank
+2.33%27.63

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