Equitable Group Inc.

Equitable Group Inc. (TSX: EQB) is a Canadian financial services business that operates through its wholly owned subsidiary, Equitable Bank. The company operates through segment like single-family lending services, commercial lending services, securitization financing etc.

Key Highlights:

• Updated Outlook: During the first quarter of FY21, the group upgraded its outlook, which shows tremendous growth prospects from its EQ Bank (30% to 50% growth in deposits) and Reverse Mortgages (200%) and Cash Surrender Value Loans (150%) segments. Moreover, the Commercial Finance Group segment’s loan book, which caters to the institutional/corporates segment is expected to grow by 20% to 25% on y-o-y basis.

Source: Company Presentation

• Strong Momentum in Deposits: The group showed constant growth in its quarterly deposits, which grew from CAD 2 billion to CAD 3 billion range during FY19 to close to CAD 6 billion in Q1FY21, supported by strong digital penetration coupled with direct customer relationship management. Currently, the group has a customer-base of more than 202,000 in Q1FY21, jumped 92% on y-o-y basis.
  

• Robust CET1 ratios: In the recent past, the group has maintained CET1 ratio above 13.5%. The Bank's CET1 Capital Ratio stood at 14.5% on March 31, 2021, compared with 13.5% on March 31, 2020. A higher level indicates better- withstanding capability during financial distress or economic slowdown.

Q1FY21 Financial Highlights:

• EQB announces its quarterly results, wherein the company posted revenue of CAD 150.170 million, up from CAD 124.845 million in Q1FY20. The increase was primarily supported by higher net interest income.
• The company performed well and reported reverse provisioning as compared to a provision for credit losses of CAD 35.687 million in Q1FY20. Hence, revenue after provision for credit losses stood at CAD 150.942 million, significantly higher than CAD 89.158 million in pcp. However, compensation and benefits and other costs remained elevated during the period.
• Net income surged to CAD 69.194 million, as compared to CAD 25.970 million in pcp.

Income Statement Highlights (Source: Company Report)

Risks: In case of lower economic growth, the group might witness a slide in profitability and its overall performance due to higher provision for credit losses.

Valuation Methodology (Illustrative): Price to Book Value

Stock Recommendation:

As per the management, reverse provisioning is expected in FY21, which is bliss for the group. For the next three years, the company expects its CET1 ratio within the 13% to 14% range, which is a key positive. Moreover, mortgage arrears rates within the single-family book are expected to remain low for the entire FY21, and the group saw strong traction from the alternative single-family lending. The group is adopting the AIRB module by early 2023 in order to improve its risk management. The recently launched EQ Bank Mortgage Marketplace for its new digital platform offers an array of mortgage products to its customers offered by the Canadian lenders, which would eventually lead to improved prospects for the group. We have valued the stock using the Price to BV based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered industry (Banking Services) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 133.03 on June 30, 2021.

One-Year Technical Price Chart (as on June 30, 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:

• Solid Common Equity Tier 1 Capital Ratio: The group reported a significantly higher CET ratio of 21.01% at the end of Q1FY21, which surpasses 19.82% in Q4FY20 and 17.73% in Q1FY20, respectively. This is a key positive as it indicates better flexibility and the ability to sail during the sluggish economic scenario.

• Improved credit quality on a sequential basis: The company reported its Net Non-Performing Loans as a Percentage of Gross Loans at 0.38% at the end of Q1FY21, which improved drastically from 0.57% in Q4FY20, despite the ongoing economic turbulence prevailed in the recent quarters. A decreasing trend indicates a better credit quality, which was supported by a revival in real estate.

• Elevated deposits through Oaken: The company manages its operations through a direct-to-consumer brand named Oaken Financial. In recent years, the group’s overall performances have been supported by the above brand, which is a key positive. At the end of Q1FY21, Oaken’s deposit constitutes 29.5% of the total group’s deposit, higher than 24.9% in Q1FY20.

Source: Company Presentation

Q1FY21 Financial Highlights:

• HCG announces its quarterly result, wherein the company posted total revenue of CAD 139.598 million, reflecting a 9.8% growth on y-o-y basis. The increase was driven by higher net interest income (CAD 125.936 million v/s CAD 114.452 million in pcp). Non-interest income also improved to CAD 13.662 million, v/s CAD 12.703 million in pcp, which also supported the top-line.
• Net interest margin stood higher at 2.61%, improved from 2.38% in Q1FY20.
• Net Income surged to CAD 64.503 million, from CAD 27.716 million in pcp.
• Loans under administration stood at CAD 22.77 billion at the end of Q1FY21, down from 0.8% at the end of Q4FY20 and down 1.1% on y-o-y basis.        

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s performances might be hindered due to the extension of the ongoing pandemic, as it would impact the overall consumer credit and might lead to higher non-performing loans.

Stock Recommendation: Despite the ongoing sluggish economic scenario, the group reported a solid operational performance supported by reverse provisioning of CAD 12.079 million, as compared to a Provision for credit losses of CAD 30.171 million in pcp. This was supported by a lower unemployment rate, which has resulted in improved credit quality. On the valuation front, the stock is available at a forward price to book value multiple of 0.9x as compared to the industry (Banking Services) average of 1.4x. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 37.20 on June 30, 2021.

One-Year Technical Price Chart (as on June 30, 2021). Analysis by Kalkine Group

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

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