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This is likely why the SP popped yesterday. GLTA
January 6, 2025
Outperform
TSX: EQB; CAD 99.07
Price Target CAD 153.00
EQB Inc.
Rise of the challenger: Assuming coverage at Outperform
Our view: We are assuming coverage on EQB with an Outperform rating and a $153 price target. We think EQB's valuation is compelling, and think its valuation could improve further as the company grows its balance sheet and in particular as it builds out its funding strategy. EQB's funding sources have diversified over the years and most importantly, its core deposits (EQ Bank) have grown significantly and shifted over the years and now has a strong(er) brand. This is a unique opportunity to own a profitable bank at an attractive valuation as it builds out an enviable deposit franchise.
Key points:
We are assuming coverage on EQB at an Outperform rating and $153 price target. Our price target reflects an 11.0x P/E multiple based on our 2026E core EPS estimate, near the middle of the 9.0-12.5x target multiple range that we use for the large Canadian banks we cover.
Our investment thesis is centred around the following:
High relative growth (EPS and ROE) that can continue for a long period of time in our view. Shorter term, we expect a bounce back in earnings power (H2/25), followed by strong EPS growth of ~17% in 2026.
Excess capital that is growing and provides significant optionality for EQB.
Potential acquisition candidate for a larger bank, particularly if it improves its funding (deposit) strategy. This should be considered longer-term optionality rather than the foundation of an investment thesis.
In 2025, we model core EPS growth of ~8% and a core ROE of 14.6%. EQB has had solid growth in core EPS as its 10-year core EPS CAGR is ~13%, which compares to the large Canadian banks' median 10-year CAGR of ~6%. Its ROE is also solid; in 2024, its core ROE was 15.1%, versus the large Canadian banks' median of 13.6%.
Many investors have concerns about the recent credit losses in the equipment leasing business, but we believe this is a shorter-term issue and expect these losses to decrease over time. We believe EQB's value lies in its solid returns that can fund the growth of its deposit franchise, and we believe that as the bank grows its deposit base and shifts to a lower- cost funding model, its valuation will improve. We also believe that further wealth management acquisitions will help decrease EQB's reliance on net interest income.
EQB is trading at a P/E multiple of 7.1x on our 2026 core EPS estimate, which compares to the large Canadian banks' median of 10.8x and its long-term historical average of 6.9x. Our price target suggests a return to target of ~56%.
Our view
By the end of Q4/24, the equipment financing portfolio was $1.2 billion, down from $1.4 billion a year ago reflecting a deliberate strategic reduction in originations in certain asset classes, discharges, and scheduled payments over the year which outpaced new originations. Equipment financing PCLs were elevated in Q4/24 mostly due to leases associated with Pride Group, a large Canadian trucking and leasing company which filed for bankruptcy earlier in 2024. Q4/24 total PCLs for equipment financing were $32.1 million or 10.6%; excluding $16.1 million in total PCLs for leases associated with Pride Group, equipment financing total PCLs would have been $16.0 million or ~5.3% (down 130 bps QoQ but up 260 bps YoY). Pride Group's bankruptcy resulted in the value of trucks decreasing across the industry. We estimate total PCLs of $25.4 million or 0.21% of total loans in Q1/25.
EQB's loan categories that are most rate-sensitive are single-family mortgages and commercial mortgages, which represent ~48% of EQB's loans under management (LUM) as of 2024. We expect loan growth to remain relatively muted in H1/25 and pick up in late 2025/into 2026. We model total loan growth of ~9% in 2025 and ~10% in 2026.
EQB is a growing challenger bank and hence it will continue to have relatively high expense growth (versus the large Canadian banks) in our view. In 2024, EQB's expense growth was ~38% and it had negative operating leverage of 3.8%. In 2025, we estimate expenses to grow ~6% and we expect relatively flat operating leverage.
We believe that acquisitions can have a profound impact on EQB's growth trajectory. EQB has solid excess capital (its Q4/24 CET 1 ratio was 14.3% versus the regulatory minimum of 7.0% for non-D-SIBs) and it has a low payout ratio (its 2024 adjusted payout ratio was 15.8% versus the large Canadian bank average of 53.5%). EQB announced the renewal of its NCIB on January 2, 2025 for a total of 2.3 million shares (~8% of public float, which compares to the large Canadian peer average NCIB size of ~2%). We believe potential acquisition targets for EQB could include another wealth management company to further build out its non-interest revenues and credit cards to round out its product offerings.
EQB is a digital bank and hence we believe its closest competitors are Tangerine (subsidiary of BNS), Simplii Financial (subsidiary of CM), and Wealthsimple (a private company). EQB has launched new products such as the notice savings account which offers customers good savings rates provided they give notice on when they plan to withdraw the money (10 or 30 days), while competitors continue to offer high interest savings accounts for several months after which rates are very low. If competitors start offering more innovative products like EQB, or achieve greater success in wealth, we believe it could diminish EQB's unique edge.
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