Lau­ren­tian down­graded, stock falls as bank faces mort­gage prob­lems

Con­cerns could cause lender to buy back up to $304M in prob­lem­atic loans

Ottawa Citizen - - FINANCIAL POST - GE­OFF ZOCHODNE Fi­nan­cial Post gzo­chodne@post­ Twit­­of­f­zo­chodne

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.”

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