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.

Q2FY20 Financial Highlights: Equitable Group Inc. impresses with its operational performance, and posted interest income at CAD 277.528 million, improved from CAD 275.152 million in the previous corresponding quarter. The increase was driven by a decent growth from retail and commercial loans segments combined with significantly higher income from investments. The quarter was marked by higher net interest income of CAD 118.707 million from CAD 114.322 million in the previous corresponding period (pcp), thanks to the elevated interest income. The bank made a conservative approach and reported a higher provision for credit losses on account of COVID-19 uncertainties. Provision for credit losses jumped to CAD 8.847 million from CAD 1.386 million in pcp. Net income declined to CAD 52.482 million against CAD 54.022 million in the previous corresponding quarter, due to an increase in the compensation and benefit expenses followed by higher other expense. Total deposit grew 8% on y-o-y basis to CAD 15.6 billion. Retail loans were up by 12% y-o-y to CAD 19 Billion, while commercial loan grew 10% to CAD 8.6 billion. The Company ended the quarter with cash and cash equivalents of CAD 569.688 million, while total assets were recorded at CAD 29,957.246 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price/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 corrected ~31% so far this year, underperforming the index by ~27% due to the ongoing fear of an economic downturn. The Company reported impressive second-quarter results with a decent loan and deposit growth. The Company's capital position remained solid with CET 1 ratio at 13.5%. The Company expects improved earnings during the second half of FY20 while the Bank's CET1 ratio is expected to increase, which is commendable. The provisions for credit losses are expected to decline on the verge of an economic recovery, which is likely to improve the bottom line. Furthermore, the launch of its Joint Savings Plus Account through its on-line platform would increase the Company's product presence in a cost-effective way, which augurs well for the margins. We have valued the stock using the P/BV based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered the peers like Bank Audi SAL, Home Capital Group Inc etc. Hence, considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 80.57 as on July 29, 2020.

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

Intact Financial Corporation

Intact Financial Corporation (TSX: IFC) is a leading property and casualty insurance company which provides services across Canada and the US. The group operates under the brand name of Intact Insurance through a network of brokers and its subsidiary, namely BrokerLink.

Q2FY20 Financial Highlights:  IFC declared its quarterly results, wherein the company reported higher net earned premiums of CAD 2,712 million as compared to CAD 2,501 million in the previous corresponding period (pcp), aided by growth in the direct premiums written. Total revenue increased to CAD 2,971 million as compared to CAD 2,729 million, a year ago, driven by decent growth from both the US and Canada regions. During the quarter, the company recorded a lower claims expense, while underwriting expense increased compared to the previous corresponding quarter. The company reported a stable finance cost of CAD 29 million as compared to CAD 28 million, a year ago. Net income attributable to shareholders soared to CAD 263 million from CAD 168 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The effects of the COVID-19 crisis related to emerging coverage issues and claims, including certain class actions relating to business interruption coverage and related defence costs, as well as other indirect claims could negatively impact the claims reserves.

Valuation Methodology: Price/Book Value Based (Illustrative)

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

Stock Recommendation:  The stock of IFC stood resilient in the recent past and appreciated ~4% and ~10% in the last three months and one-year, respectively. The company is a leading provider of property and casualty insurance in Canada and a leading provider of specialty insurance in North America and has a strong presence across the regions. The company is well poised to deal with the ongoing economic cycle and witnessed a massive growth (~33% since FY19 end) in customers through digital platforms, indicates a cost improvement. The company reported that it had improved its claims handling cycle times as ~60% of auto claims are managed digitally. Despite the ongoing economic jolt, the company reported an improved top-line along with robust bottom-line growth, which is commendable. The company expects its underwriting segment to remain on track for the later part of FY20. The company expect its direct premium written growth in the second half of 2020 in the mid-single to low-double-digit range, which is a key positive looking at the current challenging environment. The group expect Distribution EBITA and Other growth in the high-single-digit to low-double-digit range for the full year 2020. The group's investment portfolio returned to an unrealized gain position as of June 30, 2020, following the significant improvement in financial markets in Q2-2020. The group has a strong balance sheet with over CAD 1.7 billion of total capital margin, strong regulatory capital levels and ample liquidity. We have valued the stock using the P/BV based relative valuation approach and arrived at a target price, which suggests a high single-digit upside potential (in % terms). For the said purpose, we have considered the peers like Element Fleet Management Corp, Sun Life Financial Inc, IGM Financial Inc etc. Hence, considering the aforesaid facts, we recommend a 'Hold' rating on the stock at the closing market price of CAD 143.28 as on July 29, 2020. 

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

Disclaimer

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