Laurentian downgraded, stock falls as bank faces mortgage problems
Concerns could cause lender to buy back up to $304M in problematic loans
We believe operational impact can be minimal if there are no systematic underwriting issues discovered.
Shares of Laurentian Bank of Canada dipped again on Wednesday, a day after the Montreal-based lender said it had discovered “documentation issues and client misrepresentations” with tens of millions of dollars worth of mortgages that it had sold.
Laurentian disclosed Tuesday in its 2017 annual report that concerns could prompt the 171-yearold bank to buy back as much as $304 million in problematic mortgages, although the final figure may vary.
Laurentian said that it had not discovered any employee participation in the misrepresentations, that the mortgages to be repurchased were “performing in line” with its overall portfolio, and that the paperwork problems appeared to be “unintentional.” The bank added that the mortgage repurchases were not expected to cause any material harm to its operations, funding or capital.
But shares of Canada’s eighthlargest bank by market capitalization dropped another 1.3 per cent on Wednesday, after a tumble of about 7.9 per cent the day before, to close at $55.27.
Canaccord Genuity said Wednesday that it had downgraded Laurentian to speculative buy from buy, and lowered its target price on the bank’s shares to $61 from $67.
Analyst Scott Chan wrote the downgrade was mainly a reflection of the uncertainties brought about by the mortgage issues.
“We believe operational impact can be minimal if there are no systematic underwriting issues discovered in the branch channel,” he wrote.
Laurentian said in the annual report that audits unearthed “documentation issues and client misrepresentations” with $89 million of mortgages sold to an unnamed third party by Laurentian’s B2B Bank unit, which serves independent financial advisers and nonbank financial institutions. There were also “documentation issues” found for some loans underwritten in its branch network and sold to the third party.
“Over the coming months, the Bank intends to perform an indepth review of the mortgages originated in its branch network that have been sold to the Third Party Purchaser and to work with such purchaser to resolve any issues it identifies, including repurchasing any problematic mortgages if required,” it said.
Laurentian also said there had been $91 million of mortgages sold to the unnamed third party “inadvertently,” in addition to disclosing that $76 million of mortgages had been portfolio insured “while they may not have been eligible for insurance” and sold to another third party.
The annual report said the bank was implementing “new quality control functions and underwriting procedures.”
A spokesperson for Laurentian said in an email that the bank plans to finish its internal audit in February. “We have improved our processes, policies and procedures which will have a positive impact, not only on securitized loans, but on the whole book,” they added.
The affected mortgages make up a small fraction of Laurentian’s loans with the third parties, as well as on the bank’s overall balance sheet, which had approximately $36.7 billion in loans and acceptances on it, according to the annual report. But the bank still faced questions about its practices.
“While these numbers are not large relative to the bank’s overall mortgage book (and LB has not uncovered any issues with ‘rogue’ employees or brokers), their mere presence raises questions about the bank’s underwriting processes and risk management,” wrote National Bank Financial analyst Gabriel Dechaine. “The bank is ‘on the hook’ to repurchase $180 (million) of mortgages from third parties. A key concern for investors is if this figure could increase in future reports.”
Laurentian’s mortgage issues come in the wake of the crisis that struck alternative lender Home Capital Group Inc. earlier this year, but Laurentian chief executive François Desjardins told BNN that there should be no comparisons between the two situations.
“We’re very different organizations and this is a very different situation than what happened at Home (Capital),” he said. “This, to us, is really a process and paperwork issue that we have to resolve.”
Desjardins said the issues warranting mortgage repurchases included loans that were generally fine, but “didn’t fit specifically what the loan purchaser wanted;” a small percentage of cases where documents to verify client information weren’t obtained or weren’t stored properly; and an even smaller percentage of cases where the vaunted “client misrepresentation” came into play.
The Laurentian spokesperson said that the documentation problems are when they “do not have all the documents required, as per the conduit requirements,” and that misrepresentations are “a situation where the client has provided or we suspect has provided inaccurate information.”
“Sounds bad, but really what it is, is someone that inflates or embellishes what they have, either from a revenue perspective or from an asset perspective,” said Desjardins. “And it’s our job to weed that out.”
In the annual report, Laurentian reported strong financial results for the year ended Oct. 31, with net income rising 36 per cent to $206.5 million.
Laurentian said that it had not discovered any employee participation in the mortgage misrepresentations and that the paperwork problems appeared to be “unintentional.”