-- We believe that the Canadian banking sector is
encountering incremental pressure from headwinds facing the
Canadian economy, which is heightening economic risk in the
-- We also believe industry risk for the Canadian banking
sector is increasing. We expect that intensifying competition
for loans and deposits will lead to pressure on profitability
growth, especially in banks' retail businesses.
-- We are lowering our long- and short-term issuer credit
ratings on Laurentian Bank to 'BBB/A-2' from 'BBB+/A-2', and
assigning a stable outlook, following our revision of Laurentian
Bank's stand-alone credit profile to 'bbb' from 'bbb+'. In
conjunction with these actions, we are also lowering our issue
ratings on Laurentian Bank's senior unsecured debt to 'BBB' from
'BBB+' and its nondeferrable subordinated debt to 'BBB-' from
'BBB', and its preferred shares and hybrids to 'BB+' from
-- The stable outlook reflects our expectation that
Laurentian will maintain its current credit profile across a
range of future scenarios.
On Dec. 13, 2012, Standard & Poor's Ratings Services
lowered its long- and short-term issuer credit ratings on
Laurentian Bank of Canada to 'BBB/A-2' from 'BBB+/A-2'. The
outlook is stable. We also lowered our issue ratings on
Laurentian's senior unsecured debt to 'BBB' from 'BBB+', its
nondeferrable subordinated debt to 'BBB-' from 'BBB', and its
preferred shares and hybrids to 'BB+' from 'BBB-'.
In addition, we have lowered our stand-alone credit profile
(SACP) on the bank to 'bbb' from 'bbb+'.
The rating action follows our review of banking sector
industry and economic risks in Canada, taking into account the
headwinds facing the Canadian economy, Canadian consumers' high
debt levels, expectations of decelerating loan demand and
continued pressure on margins, particularly in the Canadian
retail sector, and areas of continuing weakness in the global
economy and financial system.
We believe banks and credit unions operating in Canada are
subject to an expanding set of potential stresses arising from
competitive pressure on growth and margins, while asset quality
is potentially vulnerable--in light of high consumer
indebtedness--to developments that may trigger general economic
deterioration in Canada.
Consequently, we lowered our anchor SACP, which is the
starting point for our ratings on financial institutions
operating primarily in Canada, to 'a-' from 'a'. This is
reflected in our revision of Banking Industry Country Risk
Assessment (BICRA) for Canada to group '2' from '1' and revised
our industry risk score, a component of the BICRA, to '2' from
'1' (see "Various Rating Actions Taken On Canadian Financial
Institutions Due To Rising Industry and Economic Risks,"
published Dec. 13, 2012, on RatingsDirect on the Global Credit
We believe that the banks and credit unions are under
incremental pressure from the headwinds facing the Canadian
economy. The acceleration of household debt to record levels has
increased Canadian households' vulnerability to sudden shocks in
incomes, employment, or a spike in interest rates.
Exposure to the consumer sector accounts for nearly
three-fifths of total bank loans, and losses on banks' uninsured
loan portfolios--although recent performance levels have
generally been strong--may be driven higher in the event of a
substantial shock to household creditworthiness, though we
expect effective regulatory supervision to remain a positive
influence on Canadian bank credit quality.
Although we expect ongoing intensification of competitive
dynamics in the Canadian banking sector, we note that overall
Canada still remains positioned favorably vis-a-vis most of its
global peers. However, a slowing economy risks exacerbating the
already-intense competition between banks for loan and deposit
share and puts further pressure on the margin and profitability
of the Canadian financial institutions' retail and commercial
lending businesses, the cornerstone of Canadian banking and
largest contributor to revenues.
We also believe that Canadian financial institutions' risk
tolerances may increase to compensate for lower profitability by
reaching for yield through investments, more aggressive lending
in higher yielding loans such as personal loans and credit
cards, or potentially a pick-up in mergers and acquisitions
Furthermore, we expect that continuing industry conditions
will test banks' operational capabilities. Relative performance
in areas such as service standards, cost control, operational
effectiveness, underwriting discipline, and ability to integrate
acquisitions will likely contribute to changes in market
position and financial performance, and will have an impact on
the relative credit standing among industry participants. Our
"weak" business position assessment of Laurentian recognizes the
bank's limited diversity of business lines and somewhat
concentrated regional focus.
Recent acquisitions to expand Laurentian's B2B franchise
may over time contribute to the resilience of Laurentian's
business position, although integration costs and risks offset
the potential benefits in the near term. Laurentian's capital
position benefited from recent capital issues, offsetting
acquisition-related growth in risk-weighted assets. Standard &
Poor's expects Laurentian's risk-adjusted capital (RAC) ratio to
be in the 7.5%-8.0% range over the next two years, which is
toward the lower end of the adequate range.
We also expect that earnings growth and capital generation
will be limited by the impact of integration costs in 2013. Our
view of Laurentian's risk position as "adequate" recognizes the
bank's highly favorable asset quality performance over the last
few years, offset by considerations of concentrated exposures
and managing growth.
We view Laurentian Bank's funding as "above average" and
liquidity as "adequate", given the bank's relatively low
reliance on more expensive and less reliable wholesale funds;
competition for retail deposits will likely continue to impose
margin pressure on Laurentian, however.
The stable outlook reflects Standard & Poor's expectation
that Laurentian Bank of Canada will continue to generate
sustainable and consistent earnings, supported by its solid
asset quality, adequate RAC ratio, and predominantly retail
deposit funding base.
The outlook or ratings could come under pressure if
deteriorating economic conditions lead to expectations of
substantial increases in loss rates for retail loan exposures. A
positive outlook or rating action could be the result of
material strengthening of Laurentian's capital and earnings, or
of the achievement of a more diverse earnings base, possibly
related to successful expansion of Laurentian's B2B franchise.