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RE:RE:RE:Why is there still a massive discount between HCG and EQB?

[Northforce13]

First of all, please take a deeper look at the Q1 earnings of both companies. HCG did MORE PCL than EQB as a % of loan book, so on a "normalized" basis as you suggested, HCG's Q1 profit would be similar to EQB if not greater when adjusted for PCL.

* I come up with normalized earnings of 46.4 mil for HCG and 50.4 mil for EQB
* EQB equity 1378144 = ROE 14.61%
* HCG equity 1525283 = ROE 12.16%

EQB ROE > HCG ROE by 20.1%

I would argue that EQB actually didnt do enough PCL because they have a much larger commercial loan portfolio and also equipment leasing sub that they recently purchased.

Maybe, maybe not, who knows.  Normalized earnings exludes whatever amounts they chose to use for PCL

Second, your argument contradicts iself. You said most investors based their valuation on "normalized" and "expected" future earnings and then you go on to look at PAST 5 years ROE, which makes no sense.

Banks are notoriously stable earnings wise compared to other industries.  Feel free to take a look at the average Canadian banking ROE going back 50 years or so.  If you want to assume it wont be similar in the future, that's up to you.

You are right that investors should look at future earnings. Looking at past 5 years of ROE is irrelevant because HCG was operating at 20%+ CET1 ratio vs. EQB's 13% so its stupid to compare the two companies' historical ROE to gauge future profitability.

Ah, and what do you use, a crystal ball?   ;-)  

HCG's ROE will ultimately increase over time... that's no secret to anyone.  

In fact, HCG has now caught up to EQB's profitability levels. Q1 efficiency ratio for HCG was 44% and EQB was 43%.

Yes, and HCG's ROE remains lower.  

Of course, HCG's ROE will still be lower than EQB because HCG still has massive excess capital with CET1 at 17.7%, but wouldnt you think excess capital is more valuable now in the current environment?

No difference... if they deploy it now, or in a different environment, it changes nothing, unless you are alluding that it would be easier for them to deploy it now, which * might * be true. 

It is also possible that OSFI is limiting the amount of leverage HCG is allowed to use, as each financial instution's leverage ratio target is confidential and different on a case by case basis.  

HCG can potentially take a lot of market share from EQB because they have the capital. HCG management actually talked about this in the conference call. When that happens, HCG's ROE could be even higher than EQB.

Maybe yes, if HCG ultimately deploys all its capital effectively and OSFI is not an issue.  I'd imagine some years down the road they will be quite similar in ROE levels.


Nice gains today for banks across the board


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