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, which provides mortgages on a variety of commercial property types; securitization financing, which offers insured mortgages on properties funded through securitization; and deposit services, which provides savings products, including guaranteed investment certificates, high-interest savings accounts, and deposit notes.

Recently, the company informed that Tim Wilson has resigned from the position of Chief Financial Officer.

Q2FY20 Financial Highlights: Equitable Group Inc. 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 aided by a decent growth from retail and commercial loans segments coupled with a decent increase in income from investments. EQB reported a higher net interest income of CAD 118.707 million, as compared to CAD 114.322 million in pcp, supported by higher interest income. Due to COVID-19 uncertainties, the Bank adopted a conservative approach and made higher provisions of CAD 8.847 million as compared to CAD 1.386 million in pcp. The group’s net income was marginally declined to CAD 52.482 million, as compared to CAD 54.022 million in Q2FY20. 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. During the quarter, the company reported a 10% y-o-y growth in the commercial loan to CAD 8.6 billion. The group ended the quarter with cash and cash equivalents of CAD 569.688 million, while total assets were posted at CAD 29,957.246 million.

Q2FY20 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 of EQB corrected ~29% so far this year. 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. With the gradual revival of the overall economy, the provisioning is likely to decline, which would support the bottom-line. 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. Further, the company has a strong capital position with CET 1 ratio at 13.5%. The company expects improved earnings during the second half of FY20 and expects the CET1 ratio to improve further. 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 U.S. Bancorp, Home Capital Group Inc and ECN Capital Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 77.47 on September 14, 2020.

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

Home Capital Group Inc.

Home Capital Group Inc. (TSX: HCG) is a specialty finance company which offers residential and commercial mortgage lending, securitization of insured mortgage products, consumer lending, and credit card services.

Recently, the company informed that imply Group Financial Corp had acquired the company’s point-of-sale component of Home Capital’s retail lending portfolio at a price consideration of CAD 71 million.

Q2FY20 Financial highlight: Home Capital impresses with its second-quarter results, wherein net interest income stood at CAD 115.815 million as compared to CAD 97.534 million in the previous corresponding period (pcp). The increase was driven by growth within the residential and commercial loan originations. The group reported an improvement in the net interest margin to 2.40% due to higher average yields on non-securitized products along with a decline in deposit liabilities rates. This was partially offset by the increased balance of low yielding liquid assets. The group’s efficiency ratio improved to 50.5% against 55.4% in pcp. The company’s total loan portfolio stood at CAD 17.21 billion, depicting a marginal increment of 0.5% over Q2FY19. The company reported its mortgage originations at CAD 1.50 billion in Q2FY20, relatively higher than CAD 1.28 billion in pcp, driven by healthy and resilient real estate market. Net income grew to CAD 34.132 million from CAD 31.907 million in pcp, resulted primarily from a lower provision for credit losses partially offset by higher non-interest expenses. The company reported total deposits at CAD 14.01 billion as compared to CAD 13.51 billion in Q2FY19. During the quarter, the company launched new projects in digital banking and loan origination.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company is exposed to a variety of risks including credit risk, liquidity, and funding risk. It may also be impacted by structural interest rate risk, operational risk, investment risk, strategic risk, and reputational risk. The compliance risk and capital adequacy risk along with additional risk factors may affect future results.

Valuation Methodology: Price to Book Based (Illustrative)

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

Stock Recommendation: Amid the volatility in the equity market on account of COVID-19 pandemic, the stock tumbled ~33% so far this year. However, despite a tepid economic scenario, the group reported a decent result. The group’s balance sheet remained strong, with an improvement in Common Equity Tier 1 Capital Ratio to 18.48% from 17.73% in the previous quarter. A higher Common Equity Tier 1 Capital Ratio is an indication of prudent risk management. Going forward, we expect that the performance of the business is likely to improve as the economy stabilizes and return to the growth phase. The company reported a 38.1% decline in total provision for credit losses to CAD 18.7 million. Furthermore, the launch of new projects in digital banking and loan origination is likely to address a large number of audiences in the coming days, which augurs well for improved business prospects. 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 industry (Financials) median on NTM basis. Considering the aforesaid facts, and current price movement, we recommend a ‘Buy’ rating in the stock at the current market price of CAD 22.21 on September 14, 2020.

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

Disclaimer

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