Laurentian Bank shares down as earnings dip, profit margins on loans worsen

·3 min read

MONTREAL — Laurentian Bank of Canada shares closed down more than 10 per cent Wednesday as the bank reported a drop in quarterly earnings caused by provisions for bad loans, while lower margins on interest income and a drop in personal loans also weighed.

The Montreal-based bank reported net income of $55.9 million for its third quarter, down from $62.1 million in the same quarter last year, as its set aside $11.2 million more in the quarter than last year for bad loans on the worsening economic outlook.

"The macroeconomic environment continues to be uncertain and volatile, and is being weighed down by high inflation, very rapid interest rate increases and geopolitical tensions," said chief executive Rania Llewellyn on an earnings call Wednesday.

Despite the economic pressures, the bank still expects to achieve its financial targets for the year, said Llewellyn, with the bank getting a boost from its commercial division that saw loans grow 29 per cent from a year earlier.

"Results were mostly driven by the conversion of our strong unfunded pipeline in the construction portfolio to support the multi-residential segments, as developers continue to catch up to the structural supply shortage in certain markets."

The rise in commercial loans however has also put pressure on the bank's levels of capital it needs to keep on hand, with the bank's ratio of capital requirements to assets dipping in the quarter to 9.1 per cent from 10.3 per cent a year ago.

Laurentian's net interest margin, a key measure of loan profitability, also dipped four basis points in the quarter despite rising interest rates, with the two downward trends a sign of concern for some analysts.

"On balance we view this result as negative given the 4bp of sequential margin pressure in a rising rate environment, and the fact that the bank’s CET1 ratio continues to head lower," said Scotiabank analyst Meny Grauman.

He said the bank did however come in ahead of his expectations on core cash earnings per share, while the bank's overall adjusted profitability was only slightly below analyst expectations.

The bank said its adjusted profit worked out to $1.24 per diluted share in its most recent quarter, down from an adjusted profit of $1.25 per diluted share a year ago, while analysts on average had expected an adjusted profit of $1.25 per share, according to estimates compiled by financial markets data firm Refinitiv.

Shares of the bank closed down $4.14, or 10.3 per cent, at $35.98 on the Toronto Stock Exchange after dipping to as low as $35.83.

Overall revenue totalled $260 million, up from $254.9 million for the third quarter of 2021, thanks to the commercial loan boost, while residential mortgage loans climbed one per cent from a year ago and personal loans were down 10 per cent.

Adjusted expenses were flat from a year ago as salaries were up while real estate and tech spending was down. The bank reported its efficiency ratio, which measures how well the bank turns expenses into profits, improved from a year ago on an adjusted basis, but is still running higher than other banks.

"We continue to redeploy capital, in line with our strategic plan to support profitable, sustainable organic growth," said Llewellyn

This report by The Canadian Press was first published Aug. 31, 2022.

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The Canadian Press