Investors have rewarded Montreal-based National Bank of Canada and Laurentian Bank of Canada for their increased efficiency. But now that both banks have raised their dividends, there’s less enthusiasm for their stocks. However, both banks have initiatives that could provide upside earnings surprises, making them potential longer-term holds; in fact, some analysts still consider these stocks good short-term buys.

Analysts consider National Bank the stronger of the two. Tim Johal, portfolio manager with I.G. Investment Management Ltd. in Winnipeg, believes that National Bank’s “One client, one bank” initiative is already gaining traction. This strategy involves adding 300 staff members at the branch level to “enhance the customer experience” and increase cross-selling opportunities. The initiative has involved realigning various business lines and breaking down barriers among them so that any staff member can discuss all of a client’s needs and make appropriate referrals, for which staff incentives are provided.

Laurentian is also hiring and trying to increase cross-selling opportunities, but Johal thinks Laurentian’s unionized workforce will make this difficult. In his view, “real changes on sales and service would require more flexibility.”

However, some analysts believe Laurentian’s return on equity will trend higher and, as a result, they have a “buy” rating on the stock.

A closer look at the two banks:

> National Bank Of Canada has great momentum, Johal says, adding that he could see it raising its dividend every second quarter. He notes that Quebec’s economy is performing pretty well (see story on page 18), which has helped National Bank’s commercial-banking division and has resulted in proportionately lower loan-loss provisions than those of the big national banks.

Robin Cornwell, president of Catalyst Equity Research Inc. in Toronto, has a “buy” rating on the stock and says the bank is “very well run, continues to do very well and is extending into new areas as much as it can.” His 12-month share price target is $74 vs the $69.68 the shares closed at on Jan. 21.

Other analysts have a “hold” rating on the stock, but their 12-month price targets aren’t much lower than Cornwell’s. In fact, analysts with Desjardins Securities Inc. have a target price of $73, while analysts with UBS Securities Canada Inc. and TD Newcrest, a division of TD Securities Inc. , have a target price of $71. (All companies above are based in Toronto.)@page_break@National Bank Financial Ltd., the bank’s investment-dealer arm, is increasing its focus on serving the needs of medium-sized companies. Johal views this focus as part of the “One client, one bank” strategy, noting that in the next five to 10 years, many of the bank’s business-owner clients will have to decide whether to invest in their companies or sell them. Johal also notes that Quebec-based manufacturers are trying to compete against firms in lower-wage jurisdictions and that Quebec’s population is older than the Canadian average. National Bank wants to help these firms and their owners.

Cornwell sees the new focus as targeting businesses a bit more. He says it will take a year to see if it works.

Richard Nield, portfolio manager with Toronto-based Invesco Trimark Ltd. in Austin, Tex., envisions National Bank expanding its wealth-management business outside Quebec if the bank can acquire investment-management firms and/or financial advisors. The bank already owns Altamira Investment Services Inc. funds, acquired in 2002.

National Bank’s net income for the year ended Oct. 31, 2010, was $1 billion vs $854 million for the year prior. Revenue was $4.5 billion vs $4.3 billion.

> Laurentian Bank Of Canada has cut costs and turned itself around. “You have to give management credit for this,” says Nield. This turnaround is reflected in ROE rising to 11.5% for the year ended Oct. 31, 2010, vs the historical figure of 8%-10%. The bank is aiming for ROE of 11%-13% for now, and hopes to get it above 15% over time.

This turnaround has sparked investor interest and Laurentian’s stock has outperformed in the past three years. Analysts with TD Newcrest say that the bank has caught up and, thus, they have a “hold” rating on the shares, with a 12-month price target of $52.

However, Desjardins analysts have a “buy” rating on the stock because they believe that ROE will rise; their share price target is $53. The 23.9 million outstanding shares closed at $51.62 on Jan. 21.

Nield likes the stock more than he used to. He likes the focus on selling more in the branches, although, he says, it will take time to see how much earnings power this strategy generates.

Other analysts also wonder how successful this strategy will be. More specifically, TD Newcrest analysts point out Laurentian faces competition from other Canadian banks that have increased their investment in Quebec.

Laurentian is also trying to build some capital-markets business. Nield says the bank could be successful if it finds a niche market.

Net income was $123 million on revenue of $737 million for the year ended Oct. 31, vs net income of $113 million and revenue of $667 million for the year prior. IE