The banking scene in Canada is not the exclusive preserve of the Big Six. There are many smaller financial institutions for investors to consider, some of which focus on potentially lucrative niche markets. Equitable Group Inc. (EQB-T) falls into that category. Here are the details.
Background: This company provides mortgage lending services to individuals and businesses in Canadian urban markets, with a focus on entrepreneurs and new Canadians. It carries on operations through wholly owned subsidiary Equitable Bank, a federally regulated Schedule 1 bank with total assets under management of approximately $17 billion. Equitable Bank employs about 500 people.
Stock performance: The stock traded in an upward pattern until late 2014 when it peaked at slightly over $70.It then went into a slump, albeit with upward spikes along the way. The shares fell as low as $44.73 on Jan. 20 but have since regained some of the lost ground.
Recent developments: The company reported record fourth-quarter and year-end financial results on Feb. 29. Net income for the quarter came in at $31.4-million ($1.93 per share, fully diluted), compared to $26.9-million ($1.59 per share) in the same period of 2014. On a per share basis, earnings improved by 21%.
For the full year, net income was a record $125.9-million ($7.73 per share), from $106.7-million ($6.53 per share) in 2014. On a per share basis, the increase was 18 per cent.
Return on equity (ROE) was 17.9 per cent, up from 17.4 per cent in 2014 and above the five-year average of 17.7 per cent. Book value per share was $46.57, up 14 per cent from $40.90 at year-end 2014.
The company highlighted the following statistics:
· Single-family lendingmortgage principal at year-end was a record $6.4-billion, up 20 per cent from $5.4-billion a year ago on record annual originations of $2.7-billion.
· Commercial lending mortgage principal was $2.2-billion, compared to $2.3-billion a year ago. The company said the 3-per-cent decrease reflected the bank's "disciplined approach to pricing and risk in a competitive marketplace". Commercial originations amounted to $903-million for all of 2015, up 19 per cent from the year before.
· Securitization financing mortgages under management amounted to $8-billion at the end of 2015, up 32 per cent from $6.1-billion in 2014 largely as a result of the bank's entry into the prime single family lending business.
· Deposit principal outstanding increased $730-million to stand at $8.1-billion, up 10 per cent from $7.4-billion at year-end 2014.
Looking at the balance sheet, Equitable said its capital ratios exceed minimum regulatory standards and were above the levels of most other Schedule 1 Canadian banks. As of the end of December, the common equity Tier 1 capital ratio was 13.6 per cent, surpassing the Basel III minimum of 7 per cent. It was 13.5 per cent at the end of 2014. Total capital ratio was 16.8 per cent, well above the regulatory requirement of 10.5 per cent on an all-in basis. Leverage ratio was 5.2 per cent.
"As such the bank was fully compliant with the target that OSFI (Office of the Superintendent of Financial Institutions) sets on a confidential, institution-by-institution basis," the company said.
New digital bank: In January of this year, the company launched a digital bank, known as EQ Bank, to compete in the growing on-line financial services marketplace.
"The EQ Bank platform was developed and launched by our experienced digital banking team and in partnership with several leading fintech providers," said CEO Andrew Moor. "EQ Bank will serve to diversify our sources of funding, open a direct-to-consumer channel that will allow us to capture a greater share of unproductive cash sitting in regular bank accounts, and enhance the value of our brand in the marketplace. We plan to continue investing in the platform, delivering more functionality and a broader range of products and services over time."
I checked out the EQ Bank website. The bank is not taking deposits yet, but it is inviting people to reserve a spot at rate of 3 per cent on a Savings Plus Account. That's the highest rate by far I have seen on a bank account in recent years. The website (www.eqbank.ca) says this is not a limited time promotional rate so if you're interested check it out.
Dividend: In December, the company increased its dividend by 11 per cent, to 20 cents per quarter (80 cents a year). It was the second dividend hike in 2015. The stock yields 1.6 per cent at the current price.
Conclusion: The stock appears very cheap with a trailing p/e ratio of just 6.7. It would be most appropriate for aggressive investors who are comfortable with the risks involved in the type of lending in which Equitable specializes. Ask your financial adviser if it is appropriate for your needs.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. Follow him on twitter @GPUpdates and on Facebook.
Gordon Pape