FIRESIDE TAKEAWAYS WITH EQB CFO
THE TD COWEN INSIGHT
Last week, we hosted EQB's CFO, Chadwick Westlake, for a discussion as part of the
TD Cowen Financial Services and Fintech Summit. Topics included the outlook for NIM, confidence in achieving loan growth and financial targets, a deeper dive into credit trends, an update on EQ Bank (digital bank) initiatives, and valuation.
Management is confident that it can maintain NIMs through F2024 and into F2025
(2.11% in Q2/F24 compares with 1.97% in F2023). Management points to strong treasury management and pricing discipline (focus on ROE), increased funding diversification, and higher prepayment income (as activity picks up) as sources supporting NIM.
EQB is targeting 8-12% loan growth in F2024. Management has the highest conviction
in decumulation lending (reverse mortgages and insurance loans), and insured multi-unit loans (mortgages and construction). Single-family and uninsured commercial mortgage expectations are more muted (5-10% growth), but lower rates in H2/F24 are expected to be supportive.
Management believes equipment finance PCLs have likely peaked. It noted improving
rates of early defaults YTD and stabilizing used prices for long-haul trucking. Chadwick highlighted the 71% weighted average LTV on personal loan arrears, and personal mortgage arrears improving after Q2/F24 (15% of arrears have cured). Lastly, Chadwick reiterated that commercial ACLs are generated on a loan-by-loan basis and supported by up-to-date independent property appraisals.
EQ Bank (digital bank) continues to be an important source of low-cost funding. Marketing campaigns have driven deposit growth YTD (4% q/q in Q2/F24). EQB is currently testing a small business deposit product. Lastly, it is seeing higher uptake of premium-rate payroll accounts (4.0% interest rate vs. the 2.5% base rate). Revenue sources are BIN sponsorship (leveraging EQB's payment rails), interchange fees from its payment card, international payments, and FX fees.
Management reiterated that its primary focus is an ROE target of 15%+, and its confidence in meeting F2024 EPS guidance (we are at the low end of its $11.75-$12.25 guidance range). Credit provisioning was acknowledged as the key delta that could impact EPS in F2024 (management expects PCLs in H2/F24 to be lower than H1/F24).
EQB is currently trading at 1.2x P/B and 7.2x P/E (4QF). These compare with L5Y averages of 1.1x and 7.1x, respectively. If EQB can successfully navigate through this credit cycle, we see potential for valuation to re-rate higher (management agreed).