The CEO of Laurentian Bank of Canada is tasting sweet vindication after presiding over a major turnaround at the Montreal-based bank.

At this time last year, it was a very different story for McManus and Laurentian, Canada’s seventh-largest bank.

Back then, McManus — who took over the top job in 2002, when then-CEO Henri-Paul Rousseau headed over to the Caisse de dépot et placement du Québec, the province’s giant pension-fund manager — was talking up a plan to get the bank back on the rails, but profits were sagging and the Laurentian’s stock was in the bargain bin. The bank was selling off assets and retreating to its home base in Quebec, where it faces tough competition from National Bank of Canada and the Mouvement Desjardins credit union group.

Some observers doubted Laurentian would be able to maintain its hefty $1.16 a share annual dividend — the one thing preventing an even worse stock market drubbing. To say the analysts were negative would be an understatement.

Fast-forward to this year, and things are looking a lot sunnier for McManus,

Year-over-year, Laurentian’s profits from continuing operations have surged to $55.6 million, up 40% in the fiscal year ended Oct. 31, 2005. That includes an increase of 145% — to $17.4 million — in the fourth quarter. Revenue was $462.1 million for the fiscal year, up 9% from the same period a year ago.

The stock price has gained about 45% in the past 12 months and the dividend looks solid.

“Let’s say it’s a lot easier now, a lot more pleasant,” McManus says with a laugh.

The bank’s performance in 2005 was particularly strong in retail lending and at its B2B Trust unit, which makes loans through investment advisors.

Laurentian finally settled a contract with its unionized employees after four years of trying, and opened six new branches in Quebec, an expansion not seen since 1996.

Looking back, McManus says, Laurentian got itself into trouble through activities and lines of business in which it just wasn’t big enough to compete.

It’s not a new line of thinking for McManus. In 2002, when appointed, he likened the bank to “a floundering whale.”

The excesses included maintaining a branch network outside Quebec, taking on a commercial lending portfolio that included the likes of Teleglobe Inc. and running a mutual fund company, BLC-Edmond de Rothschild Asset Management Inc.

McManus has trimmed money-losing assets and focused on retail banking in Quebec.

“It’s back to basics,” he says. “Where we made the mistake was trying to be [like] Royal Bank of Canada. We’re not like Royal Bank. We’re a regional bank and we said, ‘This is what we should be focusing on’.”

In 2003, Laurentian sold 57 branches in Ontario and Western Canada to TD Bank Financial Group. The next year, it divested Rothschild to Quebec City’s Industrial Alliance Insurance and Financial Services Inc. The latter transaction included a 10-year distribution alliance that sees the Laurentian distribute Rothschild R Funds along with Industrial Alliance mutual funds.

Laurentian has also pulled out of the business of lending to large corporations, a money pit in past years. It now focuses on small and medium-sized business that borrow $1 million-$20 million.

And just a few weeks ago, the bank sold its 51% stake in Brome Financial Corp. , which provides financial services to small and medium-sized exporters. Terms of the deal were not disclosed.

For McManus, getting back to basics has also meant putting the emphasis on serving individual customers in the Quebec market. This year, the bank intends to open three more branches in fast-growing suburban areas. It’s also replacing its ATM machines and refurbishing existing branches.

The bank has also parlayed its agreement with its unionized workforce into a deal with the Quebec Federation of Labour, the largest labour group in the province, which gives Laurentian the right to market a package of financial services to the federation’s 550,000 members and their families.

Despite the progress, however, Laurentian remains by far the least profitable of the chartered banks. A bank’s return on equity is a key measure of its profitability. In 2005, the Laurentian’s ROE on continuing operations was 6.4% — a far cry from ROEs in the high teens to 20% at the larger banks.

But McManus refuses to squeeze more profits out of the bank for short-term gain. “A lot of analysts and investors have sometimes shown impatience,” he says. “But I’ve said, ‘This is a long-term strategy. We’re going to manage for the long term, not on a quarter-to-quarter basis.’

@page_break@“If I wanted stop investing in branches and marketing and everything else, I could probably make 9% or 10% return on equity — but I would be borrowing from the future,” he adds.

The bank is still a small player in a Quebec market dominated by the National Bank and Desjardins. That’s why McManus — whose bank has 157 branches and about an 8% market share in Quebec — is still promoting the idea of teaming up with one of the Big Five banks.

The idea would be for one of the Big Five banks, which together control less than 25% of the Quebec market, to invest in a minority stake in Laurentian and hand over its branch network in the province.

McManus argues such a deal would give a Big Five bank a more meaningful Quebec presence by creating a combined institution with a market share of 10%, with room to grow.

Although the Big Five’s market position continues to erode in Quebec, none has been willing to sell branches to Laurentian ever since the bank bought 43 locations from Bank of Nova Scotia in 2000. McManus has floated his idea for more than a year, and there have been no takers. But he keeps pitching.

“Some of the analyst reports are now saying: ‘Geez, this makes a lot of sense’,” he says. “The reason another bank would have to take equity to do the deal is so they could tell the world: ‘Our strategy in Quebec is that we own a big position in the Laurentian Bank. We’re represented there’.”

Sprott Securities Inc. analyst Jason Donville predicts more progress at Laurentian in coming years, although, he says, there might be limited upside left in the stock price. “The performance of the bank is going to trend definitely upward in 2006 and 2007,” he says, complimenting the job that McManus has done in turning around a bad situation. “The bank was demoralized and it needed someone who was a good people person. As well, it needed a ‘big picture’ person who would say, ‘Hey, we need to clean this up. We need to simplify’.”

At the same time, Donville cautions, the bank still has “a long, long way to go” in improving profitability. Branch staff don’t do a good enough job of selling clients on the bank’s products. “Some people say it’s more of a post-office mentality,” he says. “They have to create more of a selling culture. But they know that, and that’s why the numbers are starting to come up.”

Donville says it makes sense for Laurentian to team up with a Big Five bank in Quebec. But he’s not holding his breath: “I just think that the large Canadian banks are just not focused on that market. They’re not overly entrepreneurial, and no one ever gets around to dealing with it.” IE