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Laurentian thrives in trying times



Published: 7 hours ago


In the midst of the worst banking crisis in decades, small, regional-based Laurentian Bank is beating the pants off its much larger rivals.


Earnings are up more than 30 per cent so far this year, and Laurentian stock has risen 37 per cent since January.


That compares with a 14-per- cent decline for Bank of Montreal shares, a one-per-cent drop at Royal Bank and a 21-per-cent fall at CIBC. The TMX financials index is down nine per cent over the same period. Laurentian has plenty of cash and its capital ratio is among the best in the industry, Réjean Robitaille says.


So much for the talk that a small financial institution could not survive in an age of behemoths.


Laurentian, the country's seventh-largest bank, had only a tiny exposure to the asset-backed commercial paper market that collapsed in Canada and no exposure to the U.S. mortgage market.


It's one of the few feel-good stories in the current financial mayhem.


In contrast, big mortgage lenders and an investment bank in the U.S. have gone down, and huge writeoffs have been taken at most of the big banks in Canada.


"It's bad," Laurentian CEO Réjean Robitaille said yesterday when I asked him about the troubles hitting the financial system.


This week, the U.S. nationalized mortgage lenders Fannie Mae and Freddie Mac, while investment bank Lehman Brothers teetered on the brink.


But investors shouldn't lump all financial institutions together, he says. In this case, small really is beautiful.


"Look around the world, there's a lot of institutions that may not have the same size as others but that are doing quite well. Why is that? Because they have a good focus, and strong execution.


"Look at what happened in the United States to the big players.


''Nobody four or five years ago would have said that Bear Stearns or Lehman Brothers" would get into trouble, Robitaille said.


Clearly, being a giant is no advantage right now. Laurentian may not have the same scale as some of its rivals, but it can react more quickly.


Give it credit for making some smart moves.


Its total exposure to the troubled non-bank, asset-backed commercial paper market, frozen last year under the so-called Montreal Accord, is just $20 million. Of that amount, about $4.3 million has been written off.


It wasn't dumb luck. The Laurentian credit committee wasn't comfortable with the ABCP market or with other exotic securities that other banks piled into, Robitaille said.


"We've got a lower risk profile. ... We weren't in subprime lending or structured investment vehicles or derivatives," he said, rhyming off some of the complex products that have backfired on bigger banks.


As a result, the balance sheet is strong and conservatively funded to a large extent by personal deposits. Laurentian has plenty of cash - about $4.5 billion - and its capital ratio is among the best in the industry, Robitaille says.


In this case, lack of ambition has served it well. Five years ago, it sold 57 branches in Ontario to TD Bank, deciding that it couldn't afford to spread itself too thin.


"We can't be everything to everyone," Robitaille says.


The bank has identified three areas where it's focusing its energy and investment.


These include the retail and small business market in Quebec, commercial real estate lending across Canada and financial products marketed to independent financial advisers.


The bank also maintains a foothold in the investment business through Laurentian Bank Securities.


Ironically, given the troubles banks have had in housing in the U.S., Laurentian is doing well by securitizing mortgages in Canada.


It packages federally insured Canada Mortgage and Housing Corp. home loans for resale to investors, earning a profitable spread when it does so.


"It's a very good product," Robitaille says, and this has turned out to be "the cheapest way to fund the bank."


Third-quarter earnings per share were a record for Laurentian.


"In a challenging year for banks, this is exceptional," said Desjardins Securities analyst Michael Goldberg in a research note.



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