Laurentian Bank of Canada (TSX:LB) recently cut its quarterly dividend from $0.67 to $0.40. This 40% cut caught many investors by surprise. It is certainly not common for Canadian banks to cut their dividends, even during times of crisis. Rightfully so, people have begun to question whether this is a sign of things to come for the Big Five.
However, it appears that Laurentian Bank’s dividend cut is the result of factors unique to Laurentian Bank that don’t exist at the Big Five. I will be using Toronto-Dominion Bank (TSX:TD)(NYSE:TD) as an example to demonstrate why the Big Five are unlikely to suffer the same fate as Laurentian Bank.
Laurentian Bank is primarily a regional bank. Regional banks inherently have a greater geographic concentration than national and international banks. Over 75% of Laurentian Bank’s loan growth comes from Ontario and Quebec. These two provinces make up a significant portion of Canada’s population and business activity. However, they were also the two provinces hardest hit by the pandemic.
This high regional exposure becomes a challenge in light of the outsized impact that COVID-19 has had, especially on Toronto and Montreal. In comparison, approximately 45% of TD’s loan portfolio is allocated to Ontario and Quebec.
High exposure to sectors hardest hit by the pandemic
I recently wrote an article about how exposed the Big Five were to the hardest-hit sectors of the economy. Besides real estate, no bank had significantly outsized exposure to any sector that was especially hard hit during the pandemic. This is not the case for Laurentian Bank.
Laurentian Bank has almost 75% of its commercial loan portfolio dedicated to the real estate, construction, and retail sectors. Needless to say, these sectors were not great places to have exposure to in March and April. For the most part, the Big Five maintain single-digit percentage exposure to each major industry sector. This means that they are much more diversified than regional banks, like Laurentian Bank. This ultimately makes them much better equipped to withstand stresses in particular sectors.
Lower deposit base
Laurentian Bank’s deposit base was just over $25 billion at the end of the 2019 fiscal year. TD had just under $1 trillion at the end of its 2019 fiscal year. Deposits are a prized source of financing for banks, as they carry a relatively low rate of interest. As long as the economy doesn’t deteriorate to the point of bank runs, this is a huge benefit for TD and the Big Five. In TD’s case, the deposit base provides almost $1 trillion of financing that the bank pays mere basis points on.
Even if other sources of financing become more expensive, as they did during the initial market panic in March and April, the availability of such a large deposit base provides the Big Five with an invaluable source of financing during times of crisis. Laurentian Bank’s deposit base is approximately 97% smaller than TD’s. Therefore, Laurentian Bank simply does not enjoy the same level of stable financing during times of crisis.
Laurentian Bank’s dividend cut certainly caught many off guard. However, investors should remain calm. The factors that resulted in Laurentian Bank’s dividend cut are idiosyncratic. The Big Five, using TD as an example, do not exhibit the same degree of risk as Laurentian Bank. This is especially true when considering geographic concentration, sector diversification, and deposit bases. These factors all indicate that investors should not expect the Big Five to cut their dividends any time soon.
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Fool contributor Kyle Walton has no position in the companies mentioned.