The top six Canadian banks continue to remain in focus due to their huge market presence and large market caps. These banking giants have also delivered consistent returns across economic cycles. However, there’s a new challenger in town, and this financial company operates virtually.
I had written about Equitable Group (TSX: EQB) in May this year, recommending investors to look at the real estate lender closely, as I felt it was trading at an attractive valuation. The stock was trading around $60 per share. The price target for the company was $81 — upside of 35%. The stock has hit that target in 70 days.
The company operates under its wholly owned subsidiary Equitable Bank (EQ Bank) and is now Canada’s ninth-largest bank. It is a virtual bank (i.e., it has a branchless approach), and it focuses on residential lending apart from its commercial lending and savings accounts segments.
Equitable has delivered a total shareholder return of 500%, the highest of any bank in the TSX Composite, from January 1, 2010, through December 31, 2019.
Strong Q2 numbers
Equitable reported its results for the second quarter of 2020 and recorded a profit of $52.5 million, down 3% from the same period in 2019 but up 102% from Q1 of 2020. Adjusted diluted earnings per share for the company’s second quarter were $2.86, down 10% from the same period in 2019 but up 68% from Q1.
As people were locked down in their homes, demand for online banking rose, and Equitable was in a perfect position to provide that service with its digital-only EQ bank. Deposits rose over $3 billion.
Deferral situation improves
Equitable has offered its customers the option to defer payments for six months as the pandemic rages on. The last month of deferrals for most customers was July.
During a conference call for analysts, Equitable president and CEO Andrew Moor said, “Our general feeling is that many of our customers called looking for a deferral just out of an abundance of caution in an uncertain economic scenario. Many of those have rolled off. And it’s clear, I think, that if there are people in financial trouble, that it’ll start to emerge now.”
However, the company believes that a large percentage of customers will be able to service their loans once the deferral period runs out. “Equitable has been proactive in working with our customers to make the return to a more normal environment a slope, rather than the ‘cliff’ being talked about in some quarters,” Moor affirmed.
The bank’s PCL (provisions for credit losses) for Q2 was $8.8 million, up 538% from the $1.4 million in the same period in 2019. However, it is a massive reduction from the $35.7 million provision that it had in the first quarter of 2020, underlining the confidence Equitable has in its customers’ ability to service loans.
The company has also said, “Qualitatively, earnings in Q3 to Q4 2020 are expected to trend positively from the earnings reported in Q2 … Assuming economic forecasts do not worsen, PCLs should decrease in subsequent quarters.”
Equitable stock continues to remain a top bet right now, and analysts have an average target price of $90.5, indicating an upside potential of 12%.
