It may be time for investors to give Laurentian Bank of Canada LB-T a little respect.
The Montreal-based bank has long been treated with some disdain relative to the Big Six. That’s partly because of its diminutive size: Royal Bank of Canada is 100 times larger, in terms of the value of its outstanding shares.
The disdain is also related to Laurentian’s disappointing long-term performance.
While shares of the Big Six have gained an average of 43 per cent over the past five years, on average, Laurentian’s share price has declined 20 per cent over the same period.
Why take a chance on a pipsqueak with inconsistent financial results and a dividend that was slashed by 40 per cent in 2020 when you can simply buy one of the behemoths and relax while the dividends come pouring in?
An answer may be emerging: Laurentian’s quarterly financial results this week were surprisingly robust, suggesting the start of a turnaround here that could translate to outsized gains if the bank can build some momentum under chief executive Rania Llewellyn.
For its fiscal second quarter, ended April 30, net income rose 12 per cent to $59.5-million. Operating profit was $1.39 a share, beating analysts’ estimates by nearly 21 per cent. That marked the largest “beat” in the banking sector during the second quarter reporting season.
Beneath these headline numbers, Laurentian showed that it is making strides.
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Loan growth, underpinned by strong commercial lending, increased by 8.6 per cent year-over-year – well ahead of the sector average of 3.5 per cent loan growth.
And the bank’s efficiency ratio, which compares operating expenses with revenue, declined to 66.3 per cent from 71.9 per cent in the same quarter last year. A low and declining ratio shows that the bank’s revenues are rising faster than expenses, which is a good thing.
Investors clearly liked the results. While the shares of the Big Six banks moved sideways over the past five trading days, Laurentian’s share priced rallied nearly 9 per cent over the same period.
The stock is now leading the banking sector in 2022, with a year-to-date gain of more than 3 per cent compared with a 2 per cent decline for the Big Six, on average.
Is the stock still worth pouncing on?
There are a couple of things working in Laurentian’s favour.
The first is low expectations. While some analysts this week raised their target prices, or where they think the price of the stock will be within 12 months, Laurentian remains remarkably unpopular.
Just one analyst currently recommends the stock as a “buy,” against eight analysts that have “hold” or “sell” recommendations. That makes Laurentian stand out from overwhelmingly bullish calls on, say, Canadian Imperial Bank of Commerce and Bank of Montreal.
That’s not a bad place to be, though: Low enthusiasm for the stock suggests that the bank might have an easier time impressing investors with better-than-expected results, while even ho-hum results might get a pass.
Similarly, Laurentian’s stock remains cheap.
It trades below 0.8 times book value, according to RBC Dominion Securities. That is lower than the 1.7 price-to-book ratio for the Big Six, on average.
The bullish case rests on the stock achieving a higher valuation. That should become easier as the bank’s management “builds credibility with investors,” Darko Mihelic, an analyst at RBC Dominion Securities and the source of the sole “buy” recommendation on the stock, said in a note.
There are risks, of course, when one looks beyond the usual suspects in the banking sector.
Some analysts are concerned about the sector’s exposure to slowing economic activity, as loan growth declines and bad loans become more prevalent in an era of rising interest rates. Smaller, less diversified banks often bear the brunt of a downtown.
As well, while Laurentian reported strong growth in commercial lending during the quarter, its bread-and-butter residential mortgage loans declined by 1 per cent from the previous quarter, indicating that personal banking is still struggling.
“We believe a sustainable stock re-rating involves Laurentian delivering a turnaround in its core personal bank,” Gabriel Dechaine, an analyst at National Bank, said in a note.
Whether Laurentian succeeds is an open question. But this week’s move in the share price suggests that investors are beginning to place their bets.
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David Berman