Standard & Poor’s Ratings Services has dropped its outlook on Laurentian Bank of Canada to negative from stable.

The rating agency says that the move reflects continued pressure on Laurentian’s core operating earnings due to its restructuring plans, the heightened level of competition within the consumer lending sector, the effect of margin compression on the retail book, and the reduced demand for commercial loans. The bank’s ratings have been affirmed.

“Despite the low interest-rate environment, which has been fueling demand for retail loans, Laurentian Bank’s loan growth has been lagging that of its competitors,” said Standard & Poor’s credit analyst Donald Chu, in a release. Competition within this sector has intensified as the major Canadian banks have been reallocating capital from their lower margin wholesale operations to their retail and wealth management businesses, and the credit union system in the province of Quebec remains very strong. Given its relative size, it could become increasingly difficult for Laurentian Bank to defend its No. 3 market share position in Quebec, thus putting continued pressure on its revenue growth and profitability.

“The bank’s frequent changes in business strategy over the years would suggest that it has been challenged in expanding and defending its business franchise, specifically in its markets outside Quebec and more recently in its home market,” it notes. “Offsetting some of these concerns are the initiatives it took to improve credit quality, including exiting non-core commercial lending relationships and reducing hold limits.”

S&P comments that, in August 2003, the bank announced a new strategic plan, which included downsizing its management team, the sale of 57 branches outside Quebec, the privatization of B2B Trust, and the disposal of certain other assets. The bank continues to execute its strategy of re-deploying the capital received from the sale of its non-Quebec branches into expanding its retail branch network mostly in and around the Montreal area, which should give it additional scale in its important home market, it notes. “The negative outlook reflects the reduced level of tolerance should Laurentian Bank’s core operating earnings fall below Standard & Poor’s expectations. At a minimum, the bank is expected to achieve the financial targets it set out in its three-year plan,” S&P concludes.