Equitable Group Inc. (TSX: EQB) is a Canada based Bank, which operates across single-family lending services, and offers mortgages for owner-occupied and investment properties. The Group has commercial lending services segment, securitization financing, and deposit services, which provides savings products, including guaranteed investment certificates, high-interest savings accounts, and deposit notes. 

EQ bank (company’s digital arm) witnessed a major surge in the deposits via digital channel, which now stood more than CAD 3 billion, which is a key positive. The growth was primarily driven by higher traffic through Digital and mobile banking segment and due to a lucrative interest rate (~2% on Savings Plus Account).

Q1FY20 Financial Highlights: Equitable Group Inc. impresses with its operational performance and interest income increased to CAD 290.19 million as compared to CAD 254.60 million in the previous corresponding quarter. The increase was by a decent growth from retail and commercial loans segments coupled with an elevated income from investments. The quarter saw a rise in the net interest income to CAD 120.15 million, from CAD 105.35 million in pcp, thanks to higher interest income. The bank made a conservative approach and reported a higher provision for credit losses on account of the unprecedented setbacks due to the COVID-19 pandemic, resulting in a slide in the bottom-line. Provision for credit losses jumped to CAD 35.69 million from CAD 9.63 million in pcp. Net income tumbled to CAD 25.97 million, against CAD 41.66 million in the previous corresponding quarter due to a rise in compensation and benefits followed by higher other expense. Total deposit grew 6% on an annual basis to CAD 15.5 billion. Retail loans were up by 11% while commercial loan grew 7%. The Company exited the quarter with cash and cash equivalents of CAD 737.335 million and total assets of CAD 29,153.88 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The quarter witnessed a significant rise in the provision for credit losses, due to the challenging macro scenario and might witness further setbacks due to prevailing weakness in the economy. Due to the higher unemployment rate and lower spending, the Loan book might face a slowdown, which can hinder the financial performance of the company.

Valuation Methodology: Price to Book Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock soared ~25% and ~38% in the last one month and three months, respectively. The Business performed decently in the recent past, amidst a prevailing gloomy scenario of economy. A slowdown in profitability marked the first quarter while margin stood as per the company’s expectation, which is commendable. The company has a systematic lending practice, and 52% of loans under management are insured, which reduces the overall risk factors. Further, the uninsured loan book has a loan to value ratio of 64%, which is decent. The company has shown handsome growth via the digital channel, and we believe, the growth is likely to sustain in the coming quarters too, which will eliminate a bunch of input costs and is a key positive for the margin improvement. We have valued the stock using the price to book based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have used industry (banking Services) average on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 71.7 on June 22, 2020.

EQB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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