Jefferies Initiate Coverage In a note titled “A Growth Bank” That Will Reward Investors, Jefferies analyst John Aiken initiated coverage of EQB Inc. with a “buy” recommendation on Thursday.
“While EQ Bank is currently attempting to clear the decks from a few missteps in credit, we believe that this provides a strong opportunity as, over the medium and long term, we have the utmost confidence that its growth trajectory and profitability are unimpeded,” he said. “Consequently, EQB provides investors with the prospect of outsized growth at a discounted valuation.”
Mr. Aiken sees the Toronto-based bank’s growth and return on equity as “impressive and argues for multiple expansion.”
“EQB’s target for EPS growth of between 12-15 per cent is demonstrably higher than its Big 6 peers,” he noted. “Further, its ROE is impressive given a lack of wealth management and arguably excess capital. Management is focused on increasing its fee-based revenues, which should be supportive to ROE while providing greater diversification. We believe that management will hit its guidance for 2025 (and meet most, if not all, of its medium term targets) which should support a lift in its valuation multiple.
“We see several avenues for earnings growth. While EQB is Canada’s 7th largest Schedule I bank, its market share is still a fraction of its Big 6 peers and our outlook for growth is predicated on: EQB’s relatively modest market share (estimated 1.5-per-cent lending) provides a long runway for growth, with an effective competitive profile as a ‘Challenger Bank’ to the ‘Big 6′; Digital customer acquisition (both personal and business) should benefit funding through deposit growth; Management is focused on increasing fee based revenues providing additional diversification and a tailwind to ROE with additional wealth management offerings likely to be introduced; EQB’s niche decumulation business provides upside to growth and profitability given the margins associated with the business and the unlikeliness that its larger competitors will follow down this path; EQB should be able to fund its outsized growth through organic capital growth as it has a low payout ratio (despite outsized dividend growth) and excess capital, which we estimate to represent roughly $250-million.”
The analyst sees “economic clouds (and question marks)” as EQB’s biggest risk, noting: “If the Canadian economy cannot resume even modest growth, our forecasts for loan growth and more normalized credit losses will be a challenge for EQB to meet.”
He set a target of $129 for EQB shares. The current average is $119.27.