National BankAs frequently happens with these markets, looks like a major overreaction. GLTA
After weighing its credit risk against its elevated valuation, National Bank Financial analyst Gabriel Dechaine lowered his recommendation for EQB Inc. to “sector perform” from “outperform” following third-quarter results that fell short of his expectations.
The Toronto-based digital financial services company reported adjusted earnings per share for the quarter of $2.76 late Wednesday, missing both Mr. Dechaine’s $2.87 estimate and the consensus projection of $2.83. He attributed the gap to higher-than-anticipated provisions for credit losses (a 4-cent drag), increased expenses (3 cents) and lower revenues (2 cents).
“Loan losses [were] higher than forecast (with another GIL spike).” said the analyst. “Two-thirds of this quarter’s provisions were tied to the equipment finance portfolio (i.e., transportation sector). While we would normally look through a ‘lumpy’ commercial loss, we have to consider the broader credit picture that includes another spike in impairments. The GIL [gross impaired loan] balance increased 25 per cent quarter-over-quarter (following a 60-per-cent spike during Q4/23), with a nearly 50-per-cent increase of Personal loan impairments and a nearly 20-per-cent increase in Commercial GILs.”
Mr. Dechaine expects expense growth to “a persistent drag” on earnings in the near term, projecting higher organic expense growth “as it builds its brand and invests in technology.”
“This trend should contrast against Big-6 banks that are currently in cost curtailment mode,” he said.
Despite a 5-per-cent increase to its quarterly dividend, Mr. Dechaine lowered his target for EQB shares to $95 from $98 based on reduced estimates to reflect higher PCLs and expenses. The average target on the Street is $105.44, according to LSEG data.
“Trading at a 1.3 times P/BV [price-to-book value] multiple, or 16 per cent above its 10-year average, we believe taking a more cautious view on the stock is warranted and are downgrading the stock to Sector Perform (was Outperform),” he said.