As predicted, they raised their target by 10%. GLTA
Strong Quarter Supports Double-digit EPS Growth
Our Conclusion
FQ2 earnings were better than expected and we revise our EPS estimates
higher. Management is delivering on its growth strategy and hitting its ROE
target. Fundamental performance is very strong and we expect credit losses
will remain well below those posted by the big banks. Better EPS growth
than the big banks should result in better share price upside. Our price target
increases from $100 to $110. We maintain our Outperformer rating.
Key Points
EPS estimates revised higher: Our F2024 and F2025 EPS estimates
increase by 4% each on higher NII and non-interest revenue.
FQ2 NIM lift to benefit future quarters: NIM expansion of 10 bps was
mostly the result of uninsured single-family mortgage (SFM) renewals at
higher rates plus a favourable deposit mix shift. Management expects NIM to
be relatively stable from here, which is more consistent with what we have
seen in recent quarters. It’s also important to note that EQB is largely
immunized from interest rate changes and, therefore, changes in the Bank of
Canada rate should have little impact. We assume flat NIM through F2024E
and 1 bps of expansion in F2025E.
Loan growth is trending in line with guidance: Loans under management
expanded 2.5% Q/Q, right on pace to meet full-year guidance of 8%-12%.
While uninsured SFM has slowed as a result of market conditions (0.5%
Q/Q), growth in multi-family mortgages of 6.8% Q/Q remains very robust.
Decumulation loans are a smaller category but are also showing very strong
growth (+10% Q/Q). Loan growth remains a very important part of the EQB
story and it should post higher loan growth than the Big 6 banks again this
year. Higher interest rates on SFM are offsetting slower loan balance growth.
Credit concerns may be an overhang, but we foresee limited downside
risk to EPS: There is a lot of focus on credit risk for EQB and all banks, for
good reasons. We view EQB as carrying less EPS risk on credit than the big
banks. The PCL ratio of 19 bps this quarter was well below the big bank
average of 39 bps and the Y/Y increase of 8 bps had an estimated EPS
impact of 6%. We assume impaired PCLs on equipment finance remain
elevated next quarter and that impaired PCLs on SFM remain de minimis.
We forecast a PCL ratio of 15 bps in FQ3 and 9 bps in FQ4.
Investments in the business are driving growth: EQB is running with high
expense growth (+19% Y/Y) due to growth initiatives. The company is
realizing results on those initiatives, with the number of EQ Bank customers
up 36% Y/Y and the small business banking offering launching at the end of
FQ2.
Valuation remains deeply discounted: EQB is trading at 7.5x P/E (NTM
consensus) vs. the big bank average of 10.7x P/E. This is despite EQB
posting better EPS growth, generating a higher-than-average ROE, reporting
a lower credit loss and having a higher CET1 ratio.