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Pedestrians walk past the head offices of Laurentian Bank in Montreal on April 1, 2015.Christinne Muschi/Reuters

Canada’s biggest banks took a pass on buying Laurentian Bank of Canada LRCDF. But that doesn’t mean investors should do the same.

This week, the Montreal-based lender announced that it had failed to attract a buyer after launching a strategic review in mid-July – ending a process in which many of the bigger banks had been considered potential bidders, Toronto-Dominion Bank TD-T and Bank of Nova Scotia BNS-T in particular.

Before Thursday’s announcement, Laurentian’s share price had reflected varying levels of optimism that a deal would be made, considering the fact that its rivals are keen to expand their geographic footprints.

The stock rallied to an intraday high of $48.23 on July 12, the first day of trading after the strategic review was announced. That marked a five-year high and a gain of nearly 44 per cent from the previous day’s closing price.

Even though the stock lost considerable ground soon after, amid reports of prospective suitors showing little interest, Thursday wrung out what optimism was left: The stock sank 12.5 per cent to $31.40, taking it back to levels last seen in June.

Back then, Laurentian was not viewed as a takeover target, but rather as a lender struggling with shrinking profits and poor operating efficiency. Surprise, surprise, it still is.

“By and large, the road ahead remains uncertain,” Joseph Ng, an analyst at Barclays, said in a note released after the For Sale sign came down this week.

He slashed his target price on the stock – or the level at which he expects it to trade within 12 months – to $32, from $42 previously. Other analysts made similar deep cuts.

In a landscape where stock pickers can choose to invest in far larger lenders with more diversified operations across business lines and geographies, Laurentian isn’t a natural choice. It lags its rivals in a number of financial metrics, including profitability, and has the unfortunate distinction of cutting its dividend in 2020 by 40 per cent.

But there may be something here now that investors can approach Laurentian as a struggling bank again, rather than as a takeover target with a lofty takeover price embedded in its stock.

This takeover premium – an estimate of what a buyer would be willing to pay above a company’s pretakeover value – has now vanished, leaving a stock that looks cheap on a number of measures.

The stock trades at just 6.7 times analysts’ estimated earnings, compared with a price-to-earnings ratio of 8.2 in the case of Canadian Imperial Bank of Commerce CM-T, another beaten-up bank stock.

Laurentian trades at 0.6 times its book value, or assets minus liabilities. That’s low compared with an average of 1.8-times book value for the Big Six banks, and it’s well below Laurentian’s 10-year average of 0.85.

And Laurentian’s dividend yield rose to six per cent this week as its share price fell, putting the payout near the top of the banking sector.

Laurentian is cheap for good reason: The bank’s return on equity – or ROE, a profitability measure that tells investors the return that a bank is generating from its assets – is low, at just 6.9 per cent in the fiscal third quarter. In the same quarter, the ROE for Canadian Western Bank CWB-T, another relatively small regional lender, was significantly higher, at 9.8 per cent.

But some analysts expect that Laurentian can improve its profitability over time, even if it takes years, by cutting costs and focusing on expanding its successful commercial banking operations. And analysts have few concerns that the bank is facing the same challenges as regional banks in the U.S., where fleeing deposits led to two failures in March.

“The strategic review was not initiated because of capital or liquidity considerations. We have no concerns on this front,” Paul Holden, an analyst at CIBC World Markets, said in a note.

The big banks might have had any number of reasons for not being interested in acquiring Laurentian. The outlook for lenders is murky, as high interest rates weigh on loan growth; a recession may be brewing; regulators are requiring banks to hold larger capital reserves; some banks are primed for U.S. growth rather than expansion in Canada.

But investors are not banks. Despite the setback in Laurentian’s share price this week, the stock’s longer-term performance isn’t out of line with its larger peers: Year-to-date, the stock is down 3.7 per cent, which is only slightly worse than the 1.5-per-cent decline for the Big Six banks, on average, suggesting that Laurentian isn’t flashing red warning lights.

To be sure, as a smaller lender, the bank presents higher risks. But as a cheaper stock, it presents greater opportunity.

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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 15/02/24 9:32am EST.

SymbolName% changeLast
Toronto-Dominion Bank
Bank of Nova Scotia
Laurentian Bank of Canada
Canadian Imperial Bank of Commerce
CDN Western Bank

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