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 in 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 in the year. Deposits surpass a mark of CAD 5.0 billion in February 2021.

Data Source: Company

• Strong NII growth and improving NIMs: Net Interest Income is the primary driver of the Bank’s profitability. Here, NII increased by CAD 13.8 million to CAD 134.0 million in Q1 2021 compared to CAD 120.2 million in the previous corresponding period. While NIM increased to 1.77% V/s 1.71%. Furthermore, the uptrend was witnessed on the sequential basis also on both parameters, which is admirable.

Data Source: Company

• Strong Capital Position: Record internal capital generation deployed to drive strong organic growth empowered the bank to improve its CET1 ratio to 14.5% in Q1 2021, up from 13.5% in Q1 2020. Once the company successfully complete the migration and receive approval from OSFI over the next couple years to move to AIRB for risk weights, it could see this capital further boost up to 400 basis points over time. Furthermore, Equitable has the highest CET1 ratio of all Canadian publicly listed banks, including banks that have already converted to AIRB.

Data Source: Company 

Financial overview 

• The interest income posted by the group in Q1 2021 stood at CAD 267.8 million, against CAD 290.1 million in the previous corresponding period. The decline was mainly due to lower performance of personal loans.
• Based on the low-interest expense, the group posted a healthy NII, which increased 11.5% to CAD 133.9 million against CAD 120.1 million in the previous corresponding period.
• Net income increased 166.8% to 69.1 million in Q1 2021 against CAD 25.9 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 as the unemployment rate is high and lower spending, the loan book might face a slowdown which can give the setbacks to the organization. 

Valuation Methodology (Illustrative): Price to Book Value

Stock recommendation

Substantial operating performance, rise in NII and NIM gave the robust earnings. Strong organic growth empowered the bank to improve its CET1 ratio to 14.5% in Q1 2021, up from 13.5% in Q1 2020. Furthermore, the company upgraded its FY 2021 Outlook, which features higher expectations for conventional loan growth and EQ bank deposits by 8-12% and 30-50%, respectively. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 141.50 as of May 26, 2021. We have considered Fiera Capital Corp Home Capital Group Inc, Timbercreek Financial Corp etc., as the peer group for the comparison.

One-Year Technical Price Chart (as on May 26, 2021). Analysis by Kalkine Group

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: In Q1 2021 the group’s total net interest income of CAD 125.9 million increased CAD 11.5 million or 10.1% from CAD 114.4 million in Q1 2020. The growth was driven by loan growth and higher net interest margin of 2.61% compared to 2.38% in the previous corresponding period. The group is continuously achieving a growth in its NII and NIM, even on sequential basis, which is reflecting the strength and resilience.

Data Source: Company

• Stable mortgage originations: The group witnessed steady mortgage originations in Q1 2021, which stood at CAD 1,600 million, compared to CAD 1,617 million in Q1 2020. The steady performance resulted primarily from single-family residential mortgage originations, which increased to CAD 1,107.5 million from CAD 968.3 million in pcp. The Company's primary emphasis remained single-family residential mortgage originations, with Classic mortgage originations accounted for 83% of the total originations.

Source: Company

• Strong and enhancing Capital Position: Record internal capital generation deployed to drive strong organic growth empowered the group to improve its CET1 ratio to 21.01% in Q1 2021, up from 17.73% in the previous corresponding period and from 19.82% compared on sequential basis.

Data Source: Company 

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the group reported total net interest income of CAD 139.5 million, which increased CAD 12.4 million or 9.8% over CAD 27.7 million in the previous corresponding period, resulting primarily from an increase in net interest income on the non-securitized loan portfolio.
• NIM improved to 2.61% in the reported period, against 2.38% in the previous corresponding period.
• The group’s net income stood at CAD 64.5 million in the reported period against CAD 27.7 million in the previous corresponding period. 

Risks associated with investment

Any rise in the provision for credit losses, due to the challenging macro scenario would affect the loan book growth which can further give the setbacks to the organization resulting in lower performance. 

Valuation Methodology (Illustrative): Price to Book Value

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

Stock recommendation

For the first quarter of FY 2021 the group reported substantial growth in its net income, book value and return on equity and going forward, we believe the conditions are in place for strong execution for the balance of 2021.We see a lot of opportunity for growth as the outlook for public health and the economy continues to improve. Moreover, it recorded internal capital generation to drive strong organic growth, empowered the group to improve its CET1 ratio to 21.01% in Q1 2021, against 17.73% in the previous corresponding period is a big positive. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 34.50 on May 26, 2021. We have considered Equitable Group Inc, Timbercreek Financial Corp, AGF Management Ltd, etc., as the peer group for the comparison.

1-Year Technical Price Chart (as on May 26, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.