Equitable Group Inc.

Equitable Group Inc. (TSX: EQB) is a Canadian Company engaged in the financial services business, operating through its wholly owned subsidiary, Equitable Bank. It serves retail and commercial customers across Canada with a range of savings solutions and lending products, offered under the Equitable Bank and EQ Bank brands. 

Key Highlights

• Consistent rise in deposits: In 2020, the company achieved all-time high profits. It managed to pursue its business goals with efficiency and diligence by ensuring an efficient operating cost structure. It also helped in achieving growth across the diversified loan portfolio. Equitable is also rapidly building franchise value from its EQ Bank platform through a CAD 1.9 billion increase in deposits. Deposits surpass a mark of CAD 5.0 billion in February 2021.

Source: Company

• Strong NII growth and improving NIMs: NII is the primary driver of the Bank’s profitability. Here, NII increased 3% compared to the last sequential quarter because of an increase in NIM by 5 bps. The NII stood at CAD 131.1 million.

Source: Company

• Strong Capital Position: The group reported consistent improvement in the CET1 ratio. At the end of 4Q20, CET1 ratio improved to 14.6% in Q4 2020, up from 13.5% in Q1 2020. Equitable has the highest CET1 ratio of all Canadian publicly listed banks, including banks that have already converted to AIRB.

Source: Company

• Consistent dividend distribution: The group continues with its dividend distribution policy. Over the last five-year period, the company’s common share dividend increased at a CAGR of 14.3%. Recently the company paid a quarterly dividend of CAD 0.37 per common share on March 31, 2021.

Source: Refinitiv (Thomson Reuters)

Financial overview Of FY2020

Source: Company

• The interest income posted by the group in FY2020 stood at CAD 1,121.6 million, against CAD 1,116.8 million in FY2019. Commercial and personal loans along investments performed well in the period and registered growth.

• Based on the low-interest expense, the group posted a healthy NII, which increased 7.5% to CAD 497.4 million, against CAD 462.6 million in the previous corresponding period.

• Net income increased 8.4% to 223.8 million in FY 2020, against CAD 206.4 million in pcp. The rise in net income was partially offset by higher provision. 

Risks associated with investment

Any rise in the provision for credit losses, due to the challenging macro scenario, the loan book might face a slowdown which can further affect the financial performance. 

Valuation Methodology (Illustrative): Price to Book Value

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The group experienced higher demand for digital banking services since the beginning of the pandemic. This is reflected in the EQ Bank deposits, which increased by 71% to CAD 4.6 billion. EQ Bank customers increased by 82% to 173,399 by year-end; this also included an increase of nearly 25,000 customers in Q4 2020 alone, which is commendable. Substantial operating performance, rise in NII, stable NIM, partially offset higher provisions, gave the robust earnings along strong organic growth empowered the bank to improve its CET1 ratio to 14.6% in Q4 2020, up from 13.5% in Q1 2020. Furthermore, the group is well-positioned to continue driving positive change in the banking industry. It plans to introduce more wealth solutions, more decumulation partnerships, additional EQ Bank services, including a digital loan solution and everyday access card. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 130.03 as of April 27, 2021. We have considered Canadian Western Bank, ECN Capital Corp, Atrium Mortgage Investment Corp etc., as the peer group for the comparison.

1-Year Price Chart (as on April 27, 2021). Source: Refinitiv (Thomson Reuters)

Home Capital Group Inc

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

Key highlights

• Rising NII and NIM: Net interest income (NII) is the primary driver of the Bank’s profitability. In FY2020 the group’s total net interest income of CAD 474.8 million increased CAD 72.6 million or 18.0% from CAD 402.2 million in FY 2019, driven by a loan growth and higher net interest margin of 2.46% compared to 2.16% in 2019. The group is continuously achieving a growth in its NII and NIM, reflecting the strength and resilience.

Source: Company

• Improved Mortgage originations: The group witnessed an improvement in the mortgage originations in FY2020, which increased by 22.8% to CAD 6.95 billion, compared to CAD 5.66 billion in FY2019. The increase resulted primarily from single-family residential mortgage originations, which increased to CAD 5.18 billion in 2020 from CAD 4.38 billion in 2019. The Company's primary emphasis remained single-family residential mortgage originations, with Classic mortgage originations accounted for 60.9% of originations and Accelerator (insured) residential mortgage originations accounting for 13.6%. The remaining 25.5% of mortgage originations were made up of residential commercial and non-residential commercial mortgages.

Source: Company

• Strong Capital Position: Record internal capital generation deployed to drive strong organic growth empowered the group to improve its CET1 ratio to 19.82% in FY 2020, up from 17.64% in the previous corresponding period.

Source: Company

• Event update: The company will release its Q1 2021 financial results on May 13,2021.

Financial overview of FY2020

Source: Company

• In FY 2020, the group reported total net interest income of CAD 474.8 million, increased CAD 72.6 million or 18.0% over CAD 402.2 million in FY2019, resulting primarily from an increase in net interest income on the non-securitized loan portfolio.
• NIM improved to 2.46% in the reported period, against 2.16% in the previous corresponding period.
• The group’s net income stood at CAD 175.7 million in the reported period against CAD 135.9 million in the previous corresponding period.

Risks associated with investment

Any rise in the provision for credit losses, due to the challenging macro scenario as the unemployment rate is high and lower spending, the loan book might face a slowdown, which can give the setbacks to the organization resulting in lower performance of the company.

Stock recommendation

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 19.82% from 17.64% in the previous year. A higher Common Equity Tier 1 Capital Ratio is an indication of prudent risk management. As the real estate market shows sign of improvement, we expect a revival in the overall business prospects, which is a key positive. Since the vaccination process started worldwide, the economy is on the verge of recovery, and the management also highlighted that the credit losses are likely to remain under control, which is notable. On the valuation front, the stock is available at a forward P/BV multiple of 0.8x against the Industry (Banking Services) median of 1.2x. Hence, considering the aforesaid rationale, we recommend a “Hold” rating on the stock at the closing price of CAD 31.84 on April 27, 2021. 

1-Year Price Chart (as on April 27, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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