Laurentian Bank (TSX: LB) has lost 24% year to date through October 15. That’s the seventh-worst performing financial stock on the TSX out of 66 companies.
Ouch.
Generally, I’m a fan of Quebec companies, because they tend to outperform the markets as a whole. Laurentian, as the stat shows, has not been one of those companies.
I’ve written about Laurentian twice in the past year — the first time last December and the second in June — and both times I argued passionately as to why Laurentian is a $60 stock dressed up as a $45 one.
In December, it was yielding 4.5%. In June, its yield was 5.6%. Today, it’s 6.2%. It continues to go backward, and although I often recommend that investors not chase yield, I’m willing to turn a blind eye in Laurentian’s case.
Here’s why
Unlike my Fool colleague Brad Macintosh, I believe that Laurentian’s big move into business banking is a wise one.
“Business-based customer revenue helped push total revenue up 8%, to $787 million over nine months compared to the equivalent nine months in 2017. Building more rapport with business clients provides diversification,” Macintosh wrote October 16. “Increased reliance on commercial banking could expose Laurentian to macroeconomic factors that influence small business success, such as employment rates, GDP growth and recessions.”
The reality is that economic slowdowns and recessions hurt personal banking operations just as much as commercial banking operations, perhaps more.
The easy pickings in the Canadian residential mortgage market have already been gotten over the past five years. The potential growth opportunities in this market are limited. Hence, why the Big Six are growing their international businesses.
However, given the big banks’ reluctance to take a risk, I see business loans as the growth play in Canadian banking today. It’s why SVB Financial, one of the best banks in North America for technology companies, is opening a Canadian lending business operating out of Toronto.
If a new bank to Canada can grab a piece of the commercial lending pie, I don’t see why a bank whose roots go back 172 years in Quebec can’t do the same.
Get paid to wait
The beauty of commercial loans and mortgages is that they generally generate higher returns. By Laurentian focusing more on business loans and less on residential mortgages, it’s doing a better job of diversifying its revenue streams, as Brad alluded to earlier, making it less vulnerable in times of economic uncertainty.
At the end of July, it had $12.3 billion in commercial loans outstanding, up 1% from October 2017. Excluding its agricultural portfolio of $380 million, which was sold in Q2 2018, they would have increased by 4.2% over the first nine months of fiscal 2018.
Of the $12.3 billion in commercial loans at the end of Q3 2018, just $105 million or 0.009% were impaired. That’s a meager amount.
Laurentian Bank’s adjusted dividend payout ratio at the end of June was 47.7%. On September 4, the board increased the quarterly dividend by 3% to $0.64 a share. Shareholders of record as of October 1, will now receive $2.56 annually for a 6.2% yield.
Even with interest rates moving higher, it’s pretty hard to find such an attractive yield out there.
If you’re an income investor, Laurentian Bank is an excellent stock to own because you get paid to wait until its turnaround entirely takes hold.
