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Mortgage crisis is Laurentian Bank CEO’s biggest test yet

Playing catch-up with its much bigger peers has been the story of Laurentian Bank's life since it was founded 171 years ago as the Montreal City and District Savings Bank. Since taking over as chief executive officer two years ago, François Desjardins has seemed to be winning the race.

Laurentian has been closing the performance gap with the Big Six banks and rationalizing its branch network ahead of schedule. A move to decertify the union representing most of its Quebec work force is in the works. And it has been expanding its commercial lending business through acquisitions and condo development loans, reducing its overdependence on residential mortgages.

Then the mother of all headaches struck this week with the news that Laurentian could be forced to repurchase as much as $300-million worth of securitized residential mortgages after a third-party audit revealed shoddy or false documentation backing up loan applications. Though the sum represents less than 1 per cent of the bank's overall loan book and it has the liquidity to buy back the mortgages, the incident has raised red flags about Laurentian's credit controls.

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"Our systems were not sufficiently refined and missed some adequate flagging mechanisms," Laurentian chief risk officer Susan Kudzman said Tuesday on a conference call with analysts. "Our new core banking system has the functionality to avoid this type of issue."

Ms. Kudzman, who joined Laurentian in 2015, is not new to this kind of hot seat. She oversaw risk management at Caisse de dépôt et placement du Québec during the asset-backed commercial paper (ABCP) crisis and subsequent 2008 market meltdown. An outside review conducted at the height of the crisis, but not made public until 2010, concluded that the Caisse's risk-management operations had been "ineffective" and lagged market practices.

Ms. Kudzman herself conceded in early 2009, after the Caisse revealed it had experienced a minus-25-per-cent return in 2008, that "most of the models" the institution had used to manage risk had "not held up."

Nothing so far suggests Laurentian's problems are of the same nature or scale as those the Caisse experienced almost a decade ago. The quality of the mortgages in question does not appear to be at issue, but rather the apparent corner-cutting and/or client misrepresentation that allowed the loans to be made in the first place.

Still, no one knows yet whether it's an isolated incident or the tip of the iceberg at Laurentian.

At the very least, it's a very big headache for Mr. Desjardins that will distract him from the main job he set out to accomplish when he became CEO two years ago. By the end of next year, the plan is to shrink the branch network to 100 outlets from 150, eliminating teller and counter jobs. More than 300 jobs have already been cut and just as many are on the chopping block.

Remaining branch employees are being retrained for other jobs, with the goal of ensuring every one of the bank's clients is assigned their own financial adviser or account manager. The bank's unionized work force has been shrinking as a result of the transformation and now accounts for only 1,500 of Laurentian's 3,700 employees.

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The union, an affiliate of the Quebec Federation of Labour, blames Mr. Desjardins for being behind an application for decertification that was filed last month before the Canadian Industrial Relations Board. Though half of the unionized employees signed decertification cards, the union insists an intimidation campaign by management had a lot to do with it. The bank denies that.

The collective agreement expires this month, meaning a labour conflict in 2018 is a strong possibility.

Still, should the decertification application succeed, it would remove a long-standing barrier to the bank's sale. Other banks have kicked Laurentian's tires over the years, but the existence of the union always ended up being a deal-breaker. None of the Big Six banks is unionized.

Desjardins Group acquired Laurentian in the early 1990s. But the giant credit union co-operative was mainly interested in Laurentian's sister insurance unit and soon spun off the bank to fend for itself. Previous CEOs, including ex-Manulife chief Dominic D'Alessandro and former Caisse head Henri Paul-Rousseau, all tried various strategies to carve out a niche for the bank. None quite succeeded. But Mr. Desjardins has impressed analysts with his work ethic and vision.

The self-confessed workaholic and computer geek – he builds computers as a hobby – started out as a teller at the bank in 1991. At 33, he was picked to run Laurentian's B2B Bank unit. He became CEO in 2015 at 44 and immediately began shaking up Laurentian's operations.

He has never been one to step back from a challenge. He now faces his biggest one yet.

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