Laurentian Bank of Canada

LB

TSX : C$45.92 
BUY  Target: C$51.50

COMPANY DESCRIPTION: Laurentian Bank of Canada (LB : TSX) is a banking institution operating across Canada and offering its clients diversified financial services. The bank serves individual consumers, SME’s, and a wide network of independent financial intermediaries through B2B Trust, as well as full-service brokerage solutions through Laurentian Bank Securities. With $34 billion in assets, LB operates approximately 153 bank branches.
All amounts in C$ unless otherwise noted.

Financials — Banks FOCUSING ON COMMERCIAL

Investment recommendation

We are maintaining our BUY rating and slightly lowering our target price to C$51.50 (from C$52.00/share) following relatively in line Q1/F14 results. Our lower target price mainly reflects our lower NIM (to 1.71% by Q4/F15) forecast to reflect the challenging rate environment. Currently, LB trades at a modest 8.2x P/E (F2015E), and a 22% discount to the Big-6 banks average. CG maintains its group bank P/E multiple of 11.5x. Our EPS growth expectations of 7%/7% are in line with the Big-6 banks at 5%/7% based on consensus estimates. LB has a good positioning toward our key bank themes for 2014 and 2015, specifically positive operating leverage (2.7% in F2015E), capital allocation strategy in regards to MRS and AGF Trust, and focus on commercial loan growth (including new leasing solutions).
Investment highlights 

Q1/F14 results neutral. LB reported adj. cash EPS of $1.29 (excluding certain items including T&I costs), which was slightly below our $1.31 estimate (vs. consensus of $1.30) and down 0.8% YoY. While total revenue was below our expectations, PCLs and adj. NIE were lower than expected. Adj. operating leverage was a strong +4.9%. The average loan balance was down 0.3% QoQ to $26.6 billion (vs. our $27.0 billion forecast).   NIM and loan outlook. NIM was flat QoQ at 1.66%, in-line with our 1.66% estimate. We forecast loan growth of 1.5% in F2014, and 3.7% in F2015 based on growth in commercial (+17% YoY), equipment leasing (new), and a relaunch of Alt-A mortgages. Mostly as a result of the expected change in loan mix towards higher margin commercial loans, we expect an increase in F2015 NIM.  Credit trends mixed; management not concerned. For Q1/F14, PCLs of $10.5 million (16 bps) were below our $11.1 million forecast and up 5% QoQ (31% YoY). That said, GILs increased 15% QoQ (down 13% YoY) to $113.9 million due to higher GILs in personal loans and commercial mortgages. Management is not concerned with the credit trends and noted a reclassification on the personal loan side and is confident of resolutions on the two problem commercial mortgages loans (and noted low LTVs). Valuation Our C$51.50/share target price is based on a 9.2x P/E multiple applied to our F2015E EPS FD. We apply a 20% discount toward the F2015E bank group P/E multiple of 11.5x that CG uses in valuing the Canadian banks