Equitable Group Inc. Upgrading to Outperform
Our View: Equitable is one of our “sleeper” ideas for 2022 that we think has the potential to have the highest total return in our coverage. EQB continues to execute well on its growth and diversification strategy. The Canadian housing and mortgage market remains strong and we think is likely to remain positive in 2022, although we expect mortgage loan growth to moderate from elevated levels. EQB continues to make good progress diversifying its funding sources, including the recent inaugural covered bond issue. Furthermore, we view the recent pullback in the shares as overdone and believe the current share price represents an attractive buying opportunity as EQB trades at 1.25x P/BV, yet we forecast a 15% ROE in 2022.
Key points:
Please see our 2022 Outlook report also published today “The Blind Side: 2022 Outlook” for more details on Equitable and our outlook for the housing and mortgage industry.
Why we are Outperform:
• Industry conditions remain positive: Despite the hot housing market in
2021, we think housing demand is likely to remain strong (e.g., low rates, increased immigration, etc.) with housing supply continuing to be weak. Although measures to cool housing/mortgage activity are likely in 2022, we think governments are likely to be cautious on new measures to avoid causing a severe housing downturn. Ultimately, we think EQB’s share price can outperform even in a slowing, but still positive, housing market.
• Significant return of capital: With OSFI recently lifting its bans on share buybacks and dividend increases, EQB’s CET1 ratio is slightly above their 13% floor. We expect EQB to resume its pre-pandemic dividend increase strategy of +20%-25% dividend increases per year.
• Potential catalysts: (1) EQB’s inaugural investor day on March 7, which may include updated 2022 guidance and a more in-depth look at EQB’s business and growth strategy; and (2) we may get an update in H2/22 on the status of EQB’s plan to switch to the AIRB approach to credit risk measurement, which should free up more capital to return to shareholders and/or provide more growth opportunities.
• Valuation: EQB is now trading at 1.25x P/BV after recent price declines yet we forecast a 15% ROE in 2022. We view the recent pullback as an attractive buying opportunity. We estimate each 0.1x change in the P/BV multiple is ~8% to the share price.
Upgrading to Outperform (was Sector Perform), but decreasing our 12- month price target to $88/share (was $91). Our decreased price target reflects a lower target valuation multiple due to a pullback in sector valuations since our last report.