A high-interest rate environment favours the banking sector, but that’s not the case in 2023. Big bank stocks have sub-par performances except for two financial stocks. EQB (TSX: EQB) and Laurentian Bank (TSX: LB) stand out because of their growth potential.
Fortress balance sheet
EQB is the logical choice if you’re looking for a growth stock in the financial services sector. This regional bank outperforms the sector, the big banks, and the broader market thus far in 2023. At $75.62 per share, the year-to-date gain is 34.85%. The dividend yield (1.52%) is modest but super safe (14.61% payout ratio).
The $2.85 billion lender operates through its wholly-owned subsidiary Equitable Bank. Concentra Bank, an Equitable Bank subsidiary, supports credit unions across Canada (six million members). Its Personal Banking division has five business lines, while Commercial Banking operates through seven business lines.
EQB’s core banking system is in the cloud and takes pride in its digital banking capabilities. Moreover, the regional bank boasts a “fortress” balance sheet owing to a prudent risk appetite and very low credit losses. Besides a nearly 100% secured loan book, it holds first credit positions on all loans.
In the second quarter (Q2) of fiscal 2023 (three months ended June 30, 2023), revenue and net income jumped 90.4% and 122.5% to $312.55 million and $130.92 million versus Q2 fiscal 2023. For the first half of fiscal 2023, revenue and net income grew 65% and 57% year over year to $580.37 million and $230.44 million.
Like most lenders, EQB raised its provision for credit losses (+149.2% to $13 million). Its president and chief executive officer (CEO), Andrew Moor, said, “Significant growth in our customer base, strong customer engagement and our plans to continue to bring innovation to the market give me well-founded confidence that we are set to thrive in the years ahead.”
Moor added that EQB provides Canadians with better value from the banking industry, including no-fee, high-interest digital services. Chadwick Westlake, EQB’s chief financial officer, expects to start fiscal 2024 strong following the standout performance. The earnings per share of 3.41% in Q2 fiscal 2023 was the highest in a quarter.
Big things are coming
Laurentian Bank, another regional bank, is lording it over the big banks. At $39.45 per share, the year-to-date gain is 25.67%, while the dividend yield is a lucrative 4.65% (39.22% payout ratio). The $1.71 billion lender offers a broad range of financial services and advice-based solutions for clients in Canada and the United States.
Some industry experts speculate LB will soon be on the selling block after announcing a strategic review. Gabriel Dechaine, an analyst at National Bank, said Canada’s Big Six banks are potential buyers. However, reports say Toronto-Dominion Bank and Scotiabank will not make a bid.
Still, LB is in the second year of a three-year strategic plan and is confident big things are coming to the bank. Its president and CEO Rania Llewellyn said LB had optimized its funding profile and ended Q2 fiscal 2023 with a very strong liquidity position and capital level. LB also launched its digital account opening solution during the quarter.
Good alternatives
Canadian big banks are solid investments and bedrocks of stability. However, EQB and Laurentian Bank outshine them, because the regional banks still have room to grow.
