EQB Inc Stock: Buy, Sell, or Hold

EQB Inc (TSX:EQB) is Canada’s fastest-growing bank.

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EQB (TSX:EQB) is one of Canada’s fastest-growing banks. Known as “Canada’s challenger bank,” it operates on a 100% online model with no branches. This business model gives EQB certain advantages over other banks. For example, it has lower staff and other overhead costs. Over the years, EQB has grown far faster than the Canadian banking sector has. It has pretty respectable profit margins as well.

Despite its many advantages, EQB does not have anywhere near the level of name recognition that the big six banks do. That’s a shame because it has more going for it than many of those banks do. There are risks as well, though. In this article, I will explore some reasons for buying, selling and/or holding EQB stock so you can decide whether it’s a fit for your portfolio.

The case for buying

The case for buying EQB stock can be built on its growth and profitability. In its most recent fiscal year, EQB delivered the following:

  • $838 million in net interest income (NII), up 14.3%
  • $550 million in cash, up 10%
  • $32 billion in deposits, up 3.2%
  • $9.59 in earnings per share (EPS), up 27%

It was a pretty phenomenal quarter. EQB grew far quicker than any of the Big Six banks did in their most recent fiscal years. Despite this, EQB trades at just 7.5 times earnings, which is cheaper than any of the Big Six banks.

The case for selling

A case for selling EQB Inc can be built on some potential adverse future scenarios. Although EQB has a high liquidity coverage ratio (340% the last time I looked it up), that’s mainly because 95% of its deposits are Guaranteed Investment Certificates (GICs). It actually only has about 10% of its deposits covered by highly liquid assets (cash and treasuries). So, if EQB’s deposit mix were to shift to more checking and savings accounts, it could run out of cash to pay depositors with.

The case for holding

A case for holding EQB can be built on the company’s cash flows. According to an online source, EQB trades at 80 times cash flow despite having a 7.5 price-to-earnings ratio. This suggests that the company’s earnings aren’t well supported by cash flows. Some say that cash flows aren’t all that relevant for banks, because they are always lending out money; this makes cash outflows desirable. Maybe so, but you’d want to see healthy cash flows from operations at least some of the time. So, EQB’s cash flows and cash position are slight negatives.

Foolish bottom line

On the whole, I think that EQB is a pretty good company. I don’t own any EQB stock, but I’d be comfortable owning it. The company’s heavily GIC-based deposit mix helps ensure that it won’t suffer a bank run, and its high growth and margins leaves it with plenty of opportunities to re-invest in itself. EQB doesn’t have the highest dividend yield among Canadian banks, but it has more room to grow than its competitors do. On the whole, its reputation as “Canada’s challenger bank” is well deserved.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends EQB. The Motley Fool has a disclosure policy.

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