A sign is displayed outside the headquarters of EQ Bank, a subsidiary of Equitable Group Inc, is seen in Toronto, Ontario, Canada May 1, 2017. REUTERS/Chris Helgren · REUTERS / Reuters
Shares of EQB, the owner of EQ Bank, fell sharply Thursday after another disappointing quarter that deepened concerns over credit quality and the bank’s ability to hit its profitability targets.
In a note to clients following the results, Jefferies Financial Group analyst John Aiken cut his recommendation on EQB’s stock to “Hold” from “Buy” and lowered his price target to $107 per share from $119, warning that the near-term outlook will remain clouded by credit strains and leadership upheaval.
“While its business model is far from broken, we do not expect to see any immediate solutions to the pressures it currently faces,” Aiken wrote.
Scotia Capital analyst Mike Rizvanovic calls EQB’s third-quarter results “a big miss,” deeming them “weak across key metrics,” with the company’s falling net interest margin, sluggish loan balances and “elevated” provisions for bad credit “across the bank’s loan portfolio.” He says the market’s “expectations on EQB’s earnings power over the medium term [were] likely to fall meaningfully relative to current consensus numbers.”
EQB shares were trading at $87.92 on the Toronto Stock Exchange as at 2:05 p.m. ET Thursday, down over 13 per cent from Wednesday’s close.
The bank reported adjusted net income of $80.3 million, down 32 per cent from a year ago and 15 per cent from the prior quarter. Adjusted diluted earnings per share came in at $2.07 versus $2.96 a year earlier, well below analysts’ consensus of $2.53. Net interest margin slipped to 1.95 per cent, while provisions for credit losses jumped to $34 million, ahead of expectations of $27 million, even as EQB raised its quarterly dividend to 55 cents per share, up 17 per cent from last year.
During a conference call with analysts Thursday morning, executives faced pointed questions about the bank’s credit quality and its plan to restore profitability. Analysts pressed hard on why EQB’s loan losses appear worse than peers, underscoring investor concern that the credit strain may not be as contained as management suggests.
Executives countered that the weakness was concentrated in a small number of mortgages in Toronto suburbs where prices have fallen 25 to 30 per cent since 2022, and said early-stage delinquencies are showing signs of improvement.
Jefferies’ Aiken also highlights that credit headwinds have now shifted from commercial to consumer lending, and that EQB is effectively sacrificing near-term margins by keeping savings rates high to hold deposits. He warns that the combination of elevated provisions, thinner margins and a new leadership team means “immediate resolution of its current difficulties [is] less likely until the new team gets its feet underneath themselves.”
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CIBC’s Paul Holden noted that management’s new guidance of roughly 11.5 per cent return on equity (ROE) this year is well below its 15 to 17 per cent objective, and asked whether that goal should be reconsidered. Royal Bank of Canada, for example, reported a 17.3 per cent ROE in its latest quarter — a measure of how efficiently a bank generates profit from shareholder capital — underscoring the gap between the country’s biggest lender and its smaller challenger.
New CEO Chadwick Westlake replied that EQB’s higher target remains a “north star,” but said the path back will depend on reigniting growth in core lending and restoring the efficiency ratio to what he called the bank’s “traditional best-in-class levels.”
The weak results come as EQB contends with the unexpected death of CEO Andrew Moor in June. In July, the bank named Westlake, who had left EQB earlier in the year to take on the CFO role at OpenText, as Moor’s successor. Westlake formally assumed the role this week. The company also appointed Anilisa Sainani, previously an executive at RBC, as its new CFO, effective Thursday.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
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