Cloud Migration And North American Lending Will Drive Efficiency

Key Takeaways

• Technology modernization and business mix shift toward specialized lending should drive higher efficiency, margins, and profitability even if revenue growth is subdued short term.
  
• Diversified funding and strong capital position enable flexible asset growth, resilience, and investment in new opportunities as market conditions improve.
  
• Persistently high expenses from digital transformation, declining revenues, rising credit risk, and reduced diversification challenge profitability and make future earnings and returns vulnerable.

Catalysts

Provides various financial services to personal, business, and institutional customers in Canada and the United States.

• The bank's ongoing technology modernization-particularly migrating from on-premise to cloud systems and simplifying its tech stack-should drive significant operational efficiency and cost reductions over time, supporting higher net margins even if revenue growth remains muted in the near term.
  
• Expanding its dealer network in inventory financing and targeted growth in commercial real estate lending position Laurentian to directly benefit from a rebound in loan demand, aided by a potential easing of North American interest rates, supporting above-average revenue growth and loan portfolio expansion when macroeconomic conditions improve.
  
• The ongoing shift in the bank's business mix toward more specialized, commercial-focused lending segments should enhance both net interest income and overall profitability as these areas offer higher margin and scalability than traditional retail lending.
  
• Strategic efforts to diversify funding-such as seeking forward flow agreements and building out broker/advisor-sourced deposits-will enable Laurentian to support future asset growth efficiently, while reducing reliance on higher-cost or less stable deposit channels, thus enhancing net interest margins and earnings resilience.
  
• The bank's solid capital and liquidity positions provide Laurentian with the flexibility to invest in growth opportunities (including potential wealth management and fee-based service expansion, as well as possible M&A) and withstand periods of credit or market volatility, positioning it for improved earnings and shareholder returns as industry conditions normalize.

Laurentian Bank of Canada Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Laurentian Bank of Canada's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.4% today to 14.6% in 3 years time.
• Analysts expect earnings to reach CA$157.8 million (and earnings per share of CA$3.85) by about September 2028, up from CA$134.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$139 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 10.2x today. This future PE is lower than the current PE for the CA Banks industry at 14.7x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.22%, as per the Simply Wall St company report.

Laurentian Bank of Canada Future Earnings Per Share Growth

Risks

• Investments in digital transformation and technology (like migrating to cloud infrastructure and simplifying the technology stack) are resulting in persistently high expense levels, with the adjusted efficiency ratio at an elevated 75.7% (well above industry norms), and management expects these elevated costs to continue until at least 2026; if the anticipated operating efficiencies or revenue growth from these investments fail to materialize, profitability (net margins) and earnings may remain structurally pressured.
  
• Year-over-year total revenue and net income both declined (revenue down 4%, net income down 8%) and return on equity dropped 80 basis points to only 5.4%, reflecting ongoing challenges in generating sustainable revenue growth and competitive returns, suggesting a structural headwind to medium-term earnings and potential for continued weak share performance.
  
• Noninterest income was down sharply by 20% year-over-year due to the divestiture of the retail brokerage division and lower fee and brokerage income, which points to reduced revenue diversification and a potential over-reliance on interest-sensitive commercial and real estate lending subject to margin compression and cyclical risks; this adds vulnerability to earnings from both external shocks (rate changes, economic slowdown) and long-term digital disruption.
  
• Gross impaired loans increased by $41.9 million year-over-year and $11.3 million sequentially, signifying rising credit risk and commercial loan portfolio migration, with management acknowledging ongoing macroeconomic volatility and that their high credit loss allowances remain elevated since the pandemic; if credit conditions deteriorate or real estate values decline, loan losses (PCL, ACL) may rise further, directly impacting net earnings.
  
• Laurentian is in the midst of a multi-year transformation with heavy upfront spending and ongoing restructuring; if macroeconomic conditions remain muted as forecast for Q4, and management needs further restructuring or fails to achieve efficiency and revenue targets, it may need to take additional charges or dilute capital, threatening future earnings and shareholder returns.

Valuation

• The analysts have a consensus price target of CA$29.889 for Laurentian Bank of Canada based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$35.0, and the most bearish reporting a price target of just CA$25.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.1 billion, earnings will come to CA$157.8 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of CA$31.05, the analyst price target of CA$29.89 is 3.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.