CIBC Initiate Coverage EQUITY RESEARCH
March 31, 2024 Initiating Coverage
EQB INC
A Rare Growth Story Among Canadian Banks
Our Conclusion
We are initiating coverage of EQB with a $100 price target and an
Outperformer rating as of March 31. Upside potential is premised mostly on
EQB being able to deliver higher EPS growth in both F2024 and F2025
versus the Big 6 banks. A high ROE and the recycling of capital into organic
growth have been the primary drivers of relative stock outperformance over
time. We expect that track record of outperformance to continue with low
credit losses, strong loan growth, and stable NIM.
Key Points
Our Outperformer thesis is premised on:
1. Double-digit loan growth: Despite the slowdown in single-family
residential (SFR) mortgage growth, we expect EQB to grow loans under
management by double digits this year and next. This is a huge growth
advantage relative to the big banks where we expect loan growth to be
more in the low to mid-single digits.
2. Track record of low credit losses continues: FQ1 brought credit risk
to the forefront despite EQB’s track record of very low losses. We expect
actual losses on SFR impairments to be minimal based on LTVs and
stable house prices. Losses on equipment finance are expected to
remain elevated, but given the size of the portfolio the impact on
earnings should not be outsized. We forecast a F2024 PCL ratio of
13 bps, well below the average of 41 bps for the Big 6 banks.
3. NIM to remain a relative advantage: EQB has not been plagued by the
same NIM compression as the big banks. We expect NIM will remain a
relative positive given growth in lower-cost deposits through EQ Bank
and effectively no NII sensitivity to central bank rate cuts. We assume
NIM is relatively flat through F2025 versus our expectation for NIM
compression at the Big 6 banks related to central bank rate cuts.
4. Regulatory capital is in a great spot: The CET1 ratio of 14.2% is well
above the Big 6 bank average despite EQB having a lower minimum
requirement. There should be no downward pressure on ROE and EPS
growth potential for EQB due to higher capital requirements. Also, EQB
accretes capital faster than the big banks and there is potential upside
should EQB eventually receive OSFI approval to transition to AIRB.
5. Valuation multiple is deeply discounted: EQB is deeply discounted
relative to the Big 6 Canadian banks and U.S. regional banks of similar
size. This is despite EQB’s higher EPS growth, higher ROE, lower PCLs,
and higher CET1 ratio. The stock is trading at a 7.2x P/E on NTM
consensus (-34% vs. Big 6) and 1.19x P/BV (-20% vs. Big 6). We are not
counting on a significant re-rate as part of our thesis, but believe there is
more room for the multiple to move higher versus lower in coming years.