Equitable Group Inc

Equitable Group Inc (TSX: EQB) is a Canadian company that operates several businesses such as, single-family lending services, which offers mortgages for owner-occupied and investment properties; commercial lending services and other financial services.

Recently, the company announced the closing of successful institutional placement of CAD 200 million, 3-year fixed-rate deposit note due September 21, 2023

Q2FY20 Financial Highlights: EQB announced its quarterly results, wherein the company reported interest income of CAD 277.528 million, as compared to CAD 275.152 million in the previous corresponding period (pcp). The increased was underpinned by growth in retail and commercial loans coupled with a decent increase in income from investments. The group reported a higher net interest income of CAD 118.707 million, compared to CAD 114.322 million in pcp, due to an increase in the interest income. The Bank reported higher provision of CAD 8.847 million, against CAD 1.386 million in pcp. The group’s net income came slightly lower at CAD 52.482 million, from CAD 54.022 million in Q2FY19. The business witnessed an improved performance wherein total deposit grew 8% on y-o-y basis to CAD 15.6 billion while retail loans surged by 12% y-o-y to CAD 19 billion. At the end of the quarter, the company reported a higher CET1 ratio at 14% compared to 13.5% in the previous quarter. The group ended the quarter with cash and cash equivalents of CAD 569.688 million, while total assets stood at CAD 29,957.246 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Book Based (Illustrative)

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

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.

Stock Recommendation: The stock of EQB soared ~43% in the last six months. Despite a slowdown in the economy, the group showed a decent growth in its businesses, which is impressive. The company reported higher provisioning, which has lowered its bottom-line to some extent. However, higher provisioning is likely to provide a cushion if any assets turned non-performing in the future. With the gradual revival of the overall economy, the provisioning is likely to decline, which would support the bottom-line. Further, the company has an impressive capital position with CET 1 ratio at 13.5%, and the company expects improved earnings during the second half of FY20 along with improvement in the CET1 ratio. The group is offering products, especially deposits via online channels. These initiatives are likely to help in improving cost efficiencies and product penetration in the market. We expect the group is likely to benefit from the low-interest-rate environment as it would help in expanding the loan book. However, the lower interest rate would build pressure on the bank’s margin. We have valued the stock using Price to Book based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Home Capital Group Inc, Canadian Western Bank and South State Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 77.34 on October 6, 2020.

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

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