Our view: EQB reported very strong Q2/23 results with normalized EPS well ahead of our forecast and consensus and 2023 guidance was increased (Adjusted EPS +18-21% Y/Y (was +10-15%)). Despite the uncertainty regarding the near-term outlook for the housing/mortgage market, we think EQB continues to execute well on its growth strategy. Within our small cap coverage, EQB remains our best idea. Increasing price target to $97/ share (was $91), maintaining Outperform rating.
Key points:
Q2/23 normalized EPS of $2.98 (excl. derivative gains, losses on investments, and acquisition-related costs) was well above our $2.53 forecast and $2.58 consensus (range of $2.53–$2.67), with the positive variance reflecting higher-than-forecast net interest income (NIM yields were +7bps Q/Q), lower-than-forecast tax rate and partly offset by slightly higher-than-forecast PCLs ($13MM vs. RBC at $11MM).
Q2/23 originations of $5.01B were ahead of our $4.54B forecast, with Personal loan originations slightly below our forecast ($2.32B vs. RBC at $2.20B) while Commercial originations were well ahead of forecast ($2.81B vs. RBC at $2.22B).
Q2/23 provisions for credit losses were a provision of $13.0MM, which higher than our $11.0MM provision forecast. Total allowance for credit losses (net of cash reserves) were 0.20% of on-balance sheet loans in Q2/23, up +1bp Q/Q and +6bps Y/Y.
2023 guidance increased, including: (1) +18-21% Adjusted EPS growth (was +10-15%); (2) +16% Adjusted ROE (was +15%); and (3) +14-16% BVPS growth (was +12-15%).
Other takeaways: (1) EQB announced the departure of Ron Tratch, SVP & Chief Risk Officer, effective August 31, 2023. Given EQB’s continued strong financial performance and also the Company’s evolution into a much larger and more diverse financial institution, our initial thought is that this change is being done to have the appropriate senior management to match the increased size and scale of the business, similar to what we think was done at the CFO position in 2020; (2) the quarterly dividend was increased +3% to $1.52/share annualized (was $1.48), slightly below our +5% forecast; (4) with EQB’s change in fiscal year end to October (from December), the company will report 10-month results for 2023.
Increasing 12-month target to $97 (was $91), maintaining our Outperform rating. The higher price target reflects better-than-forecast Q2/23 results and a slightly higher target multiple (1.25x P/BV, was 1.20x), reflecting a slightly stronger ROE forecast. Conference call tomorrow (Wednesday) at 8:30am ET; dial-in: (416) 764-8609 or webcast link on EQB website.