RBC Raises Target to $74 - "A good quarter for EQB"Q2/18 results slightly ahead of our forecast
Our view:
We think this was a good quarter for EQB. We continue to believe EQB is doing a good job of executing on its growth strategy. However, our neutral outlook for the stock reflects our cautious (but not negative) outlook for the Canadian mortgage market and what we believe is reduced investor sentiment toward mortgage companies, which we think is likely to constrain sector valuation multiples until we see early signs of a positive catalyst emerging. For small-cap investors with a longerterm investment horizon compared to our 12-month outlook, we think the current share price is attractive. Although we think EQB may not be the most defensive stock within our mortgage coverage universe, we believe it has the best risk-reward profile within our mortgage universe.
Key points:
Q2/18 normalized EPS of $2.43 was ahead of our $2.40 estimate and consensus of $2.25. Better-than-forecast net interest income, noninterest income, provisions for credit losses, and tax rate were partly offset by higher-than-forecast expenses. Provisions for credit losses of $0.2MM were better than our $1.0MM forecast. We adjusted reported EPS of $2.19 to back out fair value changes to derivative financial instruments (as we typically do for our mortgage coverage universe, as it can vary significantly quarter to quarter) as well as the write-down of unamortized deferred financing charges relating to the reduction of its back-up credit facility.
Q2/18 originations of $2.03B were ahead of our $1.69B forecast, driven primarily by higher-than-forecast insured prime single-family originations, although other loan categories had originations that were solidly ahead of our forecast, as well.
Mortgages under administration (including off balance sheet mortgages) of $24.6B were slightly ahead of our forecast of $24.1B, and +3% Q/Q and +12% Y/Y.
Raising 12-month price target to $74/share (from $66) but maintaining Sector Perform rating. Introducing 2020 forecasts. The increased price target reflects a slightly higher valuation multiple due to improved earnings visibility as the potential impacts from OSFI’s B-20 guidelines are becoming more evident.