Two More Scotia Capital analyst Meny Grauman thinks EQB Inc.’s return on equity trajectory is “strong even in a ‘higher for longer’ rate environment which leaves significant upside for the shares even after a 14-per-cent move on earnings day.”
Shares of the Toronto-based lender soared 13.5 per cent on Thursday after it reported second-quarter adjusted earnings per share of $2.81, exceeding Mr. Grauman’s expectation of $2.65 by 6 per cent as well as the consensus estimate on the Street at $2.66. He attributed the beat to “much better-than-expected” revenues, which topped his projection by 28 cents.
“NII contributed a large share of the beat thanks to a 10 bps sequential expansion in net interest margins (versus guidance of flat),” he added. “Non interest income beat expectations primarily driven by higher-than-expected mortgage commitment and other fees, net gains on loans and investments, as well as gains on securitization. EQB’s adjusted ROE came in at 15.9 per cent, and BVPS was $73.73, up 10 per cent year-over-year. EQB boosted its quarterly dividend by 7 per cent quarter-over-quarter to $0.45/share (vs. our estimate of $0.44/share). "
With EQB’s management also reiterating its full-year guidance, Mr. Grauman bumped his 2024 core cash EPS estimate by 4 per cent to $11.72, while his 2025 forecast increased by 6 per cent to $13.44 “primarily to reflect the beat this quarter, as well as Management guidance of stable NIMs, lower credit losses, low single-digit expense growth, and higher non-interest revenue as a percentage of total revenues.”
“Our first take of EQB’s Q2 result was mixed for two reasons,” he said. “First, 10 basis points of sequential margin expansion surprised us, and we wanted to wait for the call to see if this lift was sustainable. And second, we noted a mixed credit performance which saw impaired PCLs increase beyond the equipment finance portfolio and gross impaired loans increase in equipment finance and residential mortgages. On both of these fronts (margins and credit), as well as a number of others, Management guidance during the call was constructive. With respect to the margin, the bulk of that increase looks sustainable and EQB believes that there is upside potential, especially given the bank’s strong funding profile. On credit, Management reaffirmed guidance that Q2 would mark a peak for PCLs and noted that is continues to work through challenges in the equipment finance portfolio. The outlook on non-interest income was also very encouraging, as was the outlook for expense management.”
Keeping a “sector outperform” recommendation, Mr. Grauman bumped his target to $113 from $111. The average on the Street is now $105.10.
Others making target adjustments include:
* BMO’s tienne Ricard to $104 from $102 with an “outperform” rating.
“The key takeaway from the conference call is that EQB reiterated its view Q2 most likely represented a peak in provisions for credit losses with “further progress since quarter-end in commercial loan resolutions” and equipment leasing losses expected to normalize over the next couple quarters. The 2024 guidance is reaffirmed with EQB expecting a stronger H2,” said Mr. Ricard.