Laurentian Bank of Canada T.LB

cibc analyst - Downgrade Price Target (12-18 mos.): C$37.00

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Our Conclusion
A key catalyst is now off the table for Laurentian as the company announced the conclusion of its strategic review with no buyer emerging. This will likely be viewed as a negative for the stock in the near-term. The company will refocus its efforts on driving efficiencies, optimizing funding mix and allocating capital to its highest grossing businesses. We do see a path to a 10% ROE, which should result in a higher P/BV over time. Our price target ($37, down from $54) and rating (Neutral, down from Outperformer) revert back to where they stood prior to the announcement of the strategic review.

Key Points
Conclusion of strategic review: This morning, Laurentian Bank announced the conclusion of is previously announced strategic review. The company contemplated a sale of the whole business as well as selling parts of the business. It would appear there were no acceptable offers. Management and the board of directors concluded that the best path forward for the company is to follow an accelerated path of its existing strategic plan. Details will be provided with an investor day to be held in early 2024.

Acceleration of current strategic plan:
Management will place an increased focus on operating efficiency and funding optimization. We estimate an efficiency ratio of 68% in F2023 vs. a medium term objective of <65%. We estimate a F2023 NIM of 1.80% vs. a medium term objective of 1.90%. If we calibrate our assumptions to match the company’s mediumterm objectives on these two factors, then our ROE estimate would increase to close to 10% vs. our actual estimate of 8%.

Executive management changes:
LB announced that Eric Provost, current head of Commercial Banking, will also assume responsibility for personal banking. Results in the commercial bank have been strong and the personal bank is clearly where there is room for improvement. LB also changed leadership for banking operations, with Sebastien Belair, currently head of Human Resources taking the role of Chief Administrative Officer. The mandate includes further organizational streamlining to drive efficiencies, another key lever for a higher ROE.

Strong capital and liquidity:
LB is in a solid capital position with a CET1 of 9.3% and LCR ratio of 200%. The strategic review was not initiated because of capital or liquidity considerations. We have no concerns on this front.

Valuation:
LB currently trades at 0.6x P/BV vs. a 10-year average of 0.85x. The closest peer is CWB, which is currently trading at 0.8x P/BV. We estimate a F2023 ROE of 8% for LB vs. 10% for CWB and accordingly the valuation gap makes sense. Improving ROE over time should result in a multiple re-rate to ~0.8x P/BV and improving macro conditions would lift the P/BV ceiling further.

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RBC downgraded their rating to market underperform and cut their target price from C $39 to $32