Urban Market Focus Will Provide Future High-Quality Lending Opportunities

Key Takeaways

• EQB's focus on urban markets and strong residential lending aims to boost future revenues, earnings, and net margins.
  
• Increased customer deposits and strategic capital management efforts could enhance EQB's low-cost funding and future earnings growth.
  
• Key personnel changes, geopolitical uncertainty, and housing market risks threaten EQB's financial continuity, revenue growth, credit losses, and profitability amidst economic volatility.

Catalysts

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

• EQB anticipates strong growth in its uninsured single-family residential lending business due to lower interest rates and increased origination volumes, which could drive higher future revenue and earnings.
  
• The bank's strategic emphasis on urban markets with diversified economies and limited exposure to U.S. trade actions positions it to capitalize on high-quality lending opportunities, potentially improving net margins.
  
• EQ Bank's growth in customer deposits and the focus on becoming a primary bank for many Canadians suggest a potential increase in low-cost funding sources and enhanced net interest income.
  
• The anticipated recovery in equipment financing credit performance and proactive credit management actions could lead to lower provisions for credit losses (PCLs), thus enhancing net margins.
  
• EQB's strategy to increase its capital market activities, such as the oversubscribed $500 million fixed-rate deposit note offering and plans to use alternative Tier 1 and Tier 2 capital to optimize capital structure, suggest potential future EPS growth and return on equity stability.
  

EQB Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EQB's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.6% today to 35.1% in 3 years time.
• Analysts expect earnings to reach CA$543.0 million (and earnings per share of CA$13.55) by about August 2028, up from CA$377.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, down from 10.3x today. This future PE is lower than the current PE for the CA Banks industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

EQB Future Earnings Per Share Growth

Risks

• The departure of Chief Financial Officer Chadwick Westlake, who has played a key role in EQB's financial strategy and disclosure improvements, may disrupt financial continuity and affect investor confidence, potentially impacting earnings projections.
  
• The ongoing geopolitical and economic uncertainty, including potential tariffs and trade actions involving Canada, pose a risk to consumer confidence and economic stability, which could negatively affect EQB's revenue growth in key lending areas.
  
• Despite EQB's optimism, the threat of increased tariffs and economic uncertainty could lead to higher credit losses, as reflected in discussions about PCL adjustments, potentially impacting net margins if economic conditions worsen.
  
• There is some uncertainty surrounding EQB's equipment financing portfolio, which has previously required significant provisions for credit losses; this continues to pose a risk to the bank’s net interest income and profit margins if not managed effectively.
  
• Concerns about the potential impact of a weaker housing market, particularly if driven by reduced immigration levels and economic volatility, could slow EQB's loan origination and growth, affecting revenue streams associated with mortgage lending.

Valuation

• The analysts have a consensus price target of CA$113.0 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$126.0, and the most bearish reporting a price target of just CA$103.0.
• 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$543.0 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 7.2%.
• Given the current share price of CA$101.3, the analyst price target of CA$113.0 is 10.4% 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.