EQ Bank's Digital Innovations And Prime Lending Focus Will Drive Earnings Growth

Key Takeaways

• Strategic shift to high-credit quality financing and decumulation lending growth is expected to improve margins and increase revenue.
  
• Innovative product launches and strategic capital allocation focus aim to enhance customer growth, ROE, and EPS.
  
• EQB faces risks to earnings and revenue due to provisions from equipment financing, economic challenges, and uncertain resolution of impaired loans.

Catalysts

Through its subsidiary, Equitable Bank, provides personal and commercial banking services to retail and commercial customers in Canada.

• EQB is shifting its equipment financing focus to higher credit quality exposures with prime customers, which should improve net margins as credit losses are expected to reduce.
  
• With recent signs of recovery in the housing and real estate markets, EQB expects an uptick in uninsured single-family mortgage originations and retention, potentially increasing revenue through higher loan volumes.
  
• EQB is expanding its decumulation lending portfolio and multiunit residential loans, which have shown significant growth. This growth is likely to increase revenue and earnings.
  
• New product innovations, such as the successful launch of Canada's first all-digital Notice Savings Account and the EQ Bank business account, are expected to drive customer and deposit growth at EQ Bank, positively impacting earnings.
  
• EQB's medium-term guidance indicates a focus on strategic capital allocation to drive organic loan growth and new acquisition opportunities, which is expected to enhance ROE and EPS going forward.

EQB Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EQB's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 34.0% today to 43.1% in 3 years time.
• Analysts expect earnings to reach CA$655.3 million (and earnings per share of CA$15.47) by about January 2028, up from CA$390.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, down from 9.7x today. This future PE is lower than the current PE for the CA Banks industry at 12.4x.
• Analysts expect the number of shares outstanding to grow by 3.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

EQB Future Earnings Per Share Growth

Risks

• EQB's equipment financing portfolio faced significant challenges, with elevated provisions for credit losses (PCLs) impacting earnings by $16 million in Q4 2024. This was largely caused by exposure to the long-haul trucking industry, which has been affected by a recession, disrupting revenue and net margins.
  
• Concerns have arisen from irregularities in the equipment finance segment related to Pride Group, contributing $16.1 million in provisions, which indicates a risk of further financial losses and could impact earnings stability.
  
• The commercial loan portfolio also experienced delays in resolutions, with stage 3 provisions hitting $10.7 million in Q4, affecting net margins and threatening revenue streams.
  
• The economic challenges related to high-interest rates and subdued housing market activity have influenced performance, potentially affecting the bank's ability to achieve loan growth and impacting earnings.
  
• Although improvements are anticipated, the uncertainty surrounding the resolution of impaired loans and equipment financing could affect future financial performance, posing risks to net income and revenue growth.

Valuation

• The analysts have a consensus price target of CA$117.14 for EQB based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$130.0, and the most bearish reporting a price target of just CA$109.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.5 billion, earnings will come to CA$655.3 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of CA$98.97, the analyst's price target of CA$117.14 is 15.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.