Standard & Poor’s Ratings Services lowered its ratings on Laurentian Bank of Canada today, and maintained its negative outlook on the firm.

The rating agency says the downgrade reflects Standard & Poor’s concerns over continued weak earnings performance, and pressure on market share position in Quebec. Also, it says, the bank’s capital, when adjusted for a pension and post-retirement benefit liabilities shortfall, is below average.

“The bank has taken several positive initiatives to improve earnings power, such as refocusing on core Quebec markets, and rectifying the interest rate sensitivity position,” it notes. “These have benefited earnings in the recent quarter. Nevertheless, operating performance is not expected to return to historical levels and the full benefits from the repositioning might take time to materialize.”

Also, S&P adds, “The frequent changes in Laurentian Bank’s business strategy in past years would suggest that the bank has been challenged in expanding and defending its business franchise.”

“Despite a prolonged period of low interest rates, which has fuelled demand for retail loans, Laurentian Bank has not realized the same degree of loan growth as its competitors,” it says. “The
major Canadian banks have been reallocating capital to their retail and wealth management businesses, and the credit union system in Quebec remains very strong. Given its relative size, it has become increasingly difficult for Laurentian Bank to defend its No. 3 market share position in Quebec, thus putting continued pressure on revenue growth and profitability.”

S&P says some of these concerns are offset by the notable improvement in credit quality as a result of initiatives the bank undertook at the end of 2002. These initiatives were to improve the performance of the bank’s commercial lending portfolio, including exiting non-core commercial lending relationships and reducing hold limits.

“The net interest margin has also improved due to better hedging strategies,” S&P says. “Furthermore, the 2003 sale of the non-Quebec retail branches to refocus on the home markets and subsequent divestiture of a number of non-core businesses were good strategic moves, as the bank lacked the business position and scale to compete effectively in those markets and businesses.”

The negative outlook reflects Standard & Poor’s concerns over the weak future prospects. Should recent positive trends not continue, ratings could be lowered, it warns. “For a return to a stable outlook, we would have to see sustained progress in returning to core earnings levels more commensurate with other niche banks in North America,” S&P concludes.