Laurentian Bank’s main branch in downtown Montreal.
You've got to give it up to Laurentian Bank's management for pouncing on AGF Trust last summer. Without that acquisition, investors wouldn't have much reason to be hopeful.
Consider this: Laurentian's net interest margin, or the difference between the rate it borrows money at and the rate it charges to loan that money out, fell 5 basis points this quarter to 1.68 per cent.
But dig deeper and you'll see it was actually much worse, with the core (organic) margin dropping 10 basis points. The only reason the final figure wasn't so drastic is because AGF's higher margin loans saved the day.
The same is true for revenues. Without AGF, Laurentian's total revenue dropped from the same period a year ago, falling to $196-million from $199-million, and they're also down for the first half of the bank's fiscal year.
Laurentian also acknowledged that most of its 9 per cent net income growth during the first six months of fiscal 2013 stemmed from the AGF acquisition, "which more than offset the effect of a decrease in net interest margin of eight basis points over the same period," the bank said in a statement.
The problem now is that there are questions as to whether AGF's loan book will continue to prop up earnings. The portfolio generates higher margins because many of its loans are of the Alt-A variety, meaning they're more risky. Laurentian has already announced plans to run some of them off to decrease its exposure, and that could hit its bottom line.
Plus, the bank doesn't sound very hopeful about its core personal and commercial banking operation. That puts it in stark contrast with the likes of Bank of Nova Scotia, whose earnings were also propped up by an acquisition this quarter. But unlike Laurentian, Scotiabank, still saw organic strength, with retail loan growth by about 8 per cent last quarter over the year prior.
Offering investors something to look forward to, Laurentian said it expects the AGF acquisition will boost earnings by even more by the end of the year. For the past few quarters it hasn't been able to fully devote its focus to integrating the AGF platform, but that task is now priority number one, and management said it will result in more synergies.
Laurentian acquired AGF Trust in August 2012. At the time the target had about $3-billion in loans outstanding and almost $3-billion in deposits.
AGF Trust's business is centred on dealing with financial advisors whose clients want to borrow money for things like RRSP investing. About 50 per cent of AGF's loan book was comprised of investment loans, and 20 per cent came from insured mortgages.
(Tim Kiladze is a Globe and Mail Reporter.)
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