LoginSign Up
Equitable Bank's Logo
Equitable Group (EQB) Stock | TSX: EQB.TO

Equitable Group: Canada's Challenger Bank

Equitable Group Inc. (“Equitable”) operates through Equitable Bank, its wholly owned subsidiary that mainly offers non-prime residential and commercial mortgages and provides deposit and savings accounts. Canada’s “challenger bank” does things differently – it is a 100% online bank with no physical footprint and services that rival other major Canadian banks that hold trillions in assets.

Equitable envisions a better financial future for Canadians. Its low-cost operating structure helps clients obtain the best rates on a platform that is constantly expanding and increasing its value proposition. By investing in fintech (i.e., financial technology) and better customer experiences, Canadians can rest assured that there is a bank out there who is fully in it for them.

Growth

51

Valuation

91

Quality

58
Sign Up For EQB:CA Analytics

Where Are We Now

Updated on: 11/6/2021

Conviction Score

8

Equitable is a challenger bank that is changing the definition of banking as we speak. Equitable’s strategy of being an all-digital bank is treating it well currently as customers switch from traditional Canadian banks to Equitable’s easy-to-use, streamlined digital deposits and lending solutions. Equitable is still not too expensive either as it faces off against the Big 5 Canadian banks.

  • Deposits at EQ Bank, Equitable’s personal banking business, are almost at $7 billion while the customer base is growing at 60% versus last year.

  • As clients recognize Equitable’s value proposition and pump money into Equitable bank accounts, Equitable surpassed $40 billion in assets under management by pumping out mortgages and other lending solutions to high-credit clients.

Investment Thesis

  1. Equitable is relentlessly focused on providing better and more efficient services than the largest Canadian banks. Its asset base has doubled over the past five years and continues to grow quickly.

  2. The bank’s all-digital approach, non-existent physical footprint, low-cost operating structure, disciplined risk management, and partnerships with key fintech companies and brokers allow Equitable to expand its reach, manage capital well, and reinvest in its business. The result is a consumer-centric business with superior returns for shareholders.

  3. Equitable has tons of room to grow. Aside from the strong core Canadian housing market and secular demographic trends supporting growth in it, Equitable’s efforts in building open banking and modernized payments networks should propel it as a leader in the fintech and banking industries.

  4. Management at Equitable has the shareholders’ interests in mind in everything they do. Shareholder capital return and long-term thinking in terms of reinvestment or acquisitions to uphold or expand return on equity (“ROE”) bode well for the bank’s share price going forward.

The Basics

Equitable Group Inc. operates through Equitable Bank, its wholly owned subsidiary that mainly offers non-prime residential and commercial mortgages and provides deposit and savings accounts.

Equitable aspires to provide better and more efficient services than the largest Canadian banks — TD, RBC, Scotiabank, BMO, and CIBC (i.e., the “Big 5”). Equitable “challenges” these Canadian banking incumbents, hence its recently trademarked title, “Canada’s Challenger Bank”.

The bank operates solely in Canada and serves tens of thousands of customers across its Personal Banking and Commercial Banking business lines.

Personal Banking

Personal Banking works with thousands of customers through four subsets:

  • EQ Bank

  • Wealth Solutions

  • Single-Family Residential Lending

  • Wealth Decumulation

Introduced in 2016, EQ Bank addresses core banking needs of Canadians. It offers individual and joint high-interest savings accounts that have similar “everyday” functionalities to accounts provided by banks like TD and RBC. Recently, EQ Bank introduced its new tax-free savings account (“TFSA”) and retirement savings plan account offerings for savers to earn interest on their money at rates much higher than the Big 5.

Wealth Solutions provides customers with deposit products – High-Interest Savings Accounts (“HISA[s]”), Term Deposits, and Guaranteed Investment Certificates (“GIC[s]”) – to help them save and earn interest on their money.

EQ Bank and Wealth Solutions generate the funds that are used for Equitable's core personal banking businesses — lending and wealth decumulation.

Equitable Bank Total Deposits ($B) (Q3 2021)

Source: Equitable Bank Investor Relations

Single-Family Residential Lending refers to prime and alternative (i.e., non-prime – borrowers in between the “prime” and “sub-prime” categories) mortgages.

Non-prime mortgages make up 60% of the Personal Banking segment. Despite being widely referred to as a “B” lender, another term for an alternative lender, prime mortgages account for a respectable 39% of Equitable’s personal banking portfolio.

Equitable’s Wealth Decumulation products include reverse mortgages and cash surrender value (“CSV”) loans.

A reverse mortgage is a financing source for homeowners aged 55+ that works in the exact opposite way of a traditional mortgage. Instead of paying down a mortgage in regular payment intervals and building equity, a reverse mortgage “pays” the homeowner in regular intervals in the form of home equity drawdown. This cash is tax-free, but it is a form of debt that increases over time and must be paid off when the home is sold.

A CSV loan is a loan secured on a client’s whole life insurance policy. Like the reverse mortgage, the CSV loan outstanding builds over time. It Is generally repaid upon the payment of the life insurance policy’s death benefit.

Both reverse mortgages and cash surrender value loans “decumulate” wealth rather than “accumulate” by drawing down equity instead of building it.

Although the Wealth Decumulation products are growing at triple-digit rates, they represent a negligible portion of Equitable’s Personal Banking assets.

Equitable Bank Personal Banking Assets (Q3 2021)

Source: Equitable Bank Investor Relations

Equitable’s Single-Family Residential Lending and Wealth Decumulation products are the ones that make Equitable money on the retail side.

Commercial Banking

Commercial Banking serves business customers through a variety of lending solutions for many types of prospective borrowers. The commercial loan portfolio is currently comprised of:

  • Business Enterprise Solutions

  • Commercial Finance Group

  • Multi-Unit Insured Mortgages

  • Specialized Finance

  • Equipment Leasing

Business Enterprise Solutions serve entrepreneurs and small and medium-sized (“SME”) businesses. The bank targets small-business owners, entrepreneurs of all sorts, real estate owner operators, and emerging real estate investors.

The Commercial Finance Group serves large investors, especially institutions and corporate investors involved primarily in commercial real estate. Loans are typically made in amounts of $2.5 million and up, typically to fund capital expenditures and operational costs.

Multi-Unit Insured Mortgages refer to CMHC (Canada Mortgage and Housing Corporation)-insured mortgages on commercial properties including multi-family residential units.

The Specialized Finance team provides credit facilities to specialty lender in underbanked and unconventional industries. These lending solutions are meant to address the unique needs of each client. Loans can be structured in many ways in amounts ranging from $15 million to $100 million or more.

The Equipment Leasing segment is Equitable’s secured lending arm that provides financing for commercial vehicles and equipment, namely in the transportation, construction, and food service industries.

Equitable operates in this segment through Bennington Financial Corp.

(“Bennington”), a company Equitable acquired in 2019. Bennington has a large, independent distribution network and runs as one of Canada’s only broker-based equipment and vehicle leasing companies.

Combined with mixed-use and non-residential real estate, the total real estate concentration adds up to nearly the total portfolio. Together, Specialized Finance and Equipment Leases make up a much smaller of the commercial loan portfolio.

Equitable Bank Commercial Banking Assets (Q3 2021)

Source: Equitable Bank Investor Relations

Although Equitable’s commercial loans are heavily concentrated in real estate, almost half of these loans are insured by the CMHC (i.e., Canada Mortgage and Housing Corporation). This reduces some of Equitable’s downside risk related to real estate and potential client insolvencies.

All Equitable’s Commercial Banking products make Equitable money.

Financial Overview

Equitable’s asset mix has been evolving quickly amid innovation in its funding sources. In other words, as Equitable introduces new competitive banking solutions to help clients save and earn, it obtains cost-effective funding that it can use to diversify its asset portfolio.

The segment with the largest growth between 2015 and 2020 has been prime single-family mortgages. Although Equitable is known as a non-prime lender, its business with prime customers is profitable, high-quality, and growing.

Equitable Bank Asset Mix — 2015

Source: Equitable Bank 2020 Annual Report

Equitable Bank Asset Mix — 2020

Source: Equitable Bank 2020 Annual Report

Between these years, total deposits doubled from about $14 billion in 2015 to $28 billion in 2020 to which EQ Bank deposit growth contributed substantially.

Equitable Bank Funding Mix Evolution ($B)

Source: Equitable Bank 2020 Annual Report

Equitable’s efforts are paying off – between 2011 and 2020, revenues, diluted earnings per share (“diluted EPS”), and book value per share rose by double-digit rates in the teens. Growth is abundant and showing no signs of slowing.

Equitable Bank Historical Revenues ($M) (Q3 2021)

Equitable Bank Historical Book Value per Diluted Share ($ / share) (Q3 2021)

History

Equitable Bank was founded in 1970 as The Equitable Trust Company in Hamilton, Ontario. The company’s history of challenging the way things are done in the banking industry started with a handful of risk-taking entrepreneurs having a vision to do things differently.

By 1990, Equitable became an operating company with $50 million in assets and four employees working out of the Toronto office. What may have seemed like slow progress accelerated in the next 14 years. Equitable became a public company in 2004, the same year it hit its $1.5-billion asset milestone.

Equitable continued to grow throughout the 2000s until 2013, when Equitable was granted a Schedule I bank license. That year was the same year Equitable’s old name was dropped and became “Equitable Bank”.

The growth since Equitable became a Schedule I bank has been phenomenal. EQ Bank was launched in 2016 as the first digital-born bank. Today, Equitable manages about $33 billion in assets. Growth has been robust and makes for an exciting future.

Competitive Advantages

Canada’s All-Digital Bank

Equitable is the most efficient Schedule I bank in Canada, operating entirely as a digital model with no physical retail footprint. EQ Bank is Canada’s first all-digital bank with aspirations to lead the imminent mobile-first future that awaits us. Equitable was also the first Canadian bank to migrate its core banking operations onto the cloud.

The bank derives major advantages from being an all-digital bank. For one, it can target underserved Canadians that are not within the footprint of other major Canadian banks. Secondly, Equitable has a lean, all-digital operating model that is much more efficient than other Schedule I banks. Equitable’s efficiency ratio (i.e., non-interest expenses divided by revenue) has been consistently below the peer average.

With this, Equitable can establish itself in niche markets and regions in Canada, as well as reinvest its savings from its branchless model right back into where it matters most for clients and shareholders – the business.

Disciplined Risk Management

Operating primarily as a non-prime lender, Equitable faces risks that other major Canadian banks may not. Its client base, in the aggregate, will be of lower credit quality than the others. To combat these risks, Equitable employs a disciplined risk management model that allows it to rival the risk profile of the Big 5.

Equitable protects itself by following a few stringent practices:

  • Lending only to liquid urban and suburban markets

  • Avoiding direct lending to oil and gas companies

  • Diversifying commercial lending across industries and geographies

  • Focusing on commercial asset classes that are recession-resilient, like multi-unit residential and mixed-use properties

  • Limiting uninsured lending exposure in Alberta

  • Requiring cash deposits on higher-risk leases

Equitable also has a high-quality portfolio of assets despite the amount of non-prime loans. The average credit score of a non-prime single-family residential borrower was 702 in 2020, up from 691 in 2019. On the small business side, this credit score was 741.

The bank insures many of its loans to further prevent downside. 100% of the loan portfolio is secured by some sort of asset (i.e., the real estate itself in the case of a mortgage, a vehicle for leases, etc.) and 56% of loans are insured against credit losses with the Government of Canada being the ultimate backstop. Based on the bank’s stress test, it determined its expected credit losses in the worst, yet realistic, economic scenario, would be around $110 million, a relatively small fraction of Equitable’s total assets.

Equitable's Future Credit Losses EstimatesSource: Equitable Bank 2020 Annual Report

The effects of these practices are profound, and the numbers are clear — Equitable’s credit losses to total loans are the lowest among all Schedule I banks.

Strong Partnerships

As a 100% online business, Equitable knows it may be challenged with existing and prospective client outreach. It needs help to reach clients and build awareness – to do this, it has built a foundation of a few key partnerships with technology, fintech, and financial services companies.

Equitable's Listing of Key PartnershipsSource: Equitable Bank 2020 Annual Report

These companies work with Equitable to maintain and build on a great online banking interface with functionality that rivals other major banks. For example, TransferWise enables EQ Bank to send international money transfers at a fraction of the cost of a Big 5 bank wire transfer.

Additionally, Equitable partners with brokers and agents to provide deposit services, originate loans, and continually expand its product offerings. This is facilitated through EQ Bank’s partnership with nesto to launch the Mortgage Marketplace in May 2021. The Mortgage Marketplace offers customers a network of over 2,000 mortgage products from various brokers and lenders.

Even though Equitable risks losing a prospective customer to a competing bank in the Mortgage Marketplace, it increases the number of eyes on Equitable’s mortgage products. The bank is confident that its ultra-low mortgage rates will drive mortgage volumes higher, and cross-selling opportunities will be robust. If the customer is lost, Equitable still makes some money on the referral to a competing bank.

By expanding their channels and service distribution network, Equitable makes it more likely that a client will end up banking with Equitable. The more customers it can reach to provide the exceptional service that other Schedule I banks cannot, the faster it can grow and reinvest in newer and improved financial products and services.

Canada’s Most Innovative Bank

The most compelling opportunity at Equitable is its commitment to do the right thing differently, and to do it all digitally. While the other Schedule I banks are still focused on what has worked historically, Equitable is using its small size, digitally inclined client base, and growth mindset to look forward to building the “bank of tomorrow”.

Two areas of growth opportunities for Equitable are:

  • Open Banking

  • Payment Modernization

Open Banking

Open banking is a concept that would empower and allow clients of banks and other financial institutions to reduce the cost and time of switching banks. The nature of the Canadian banking industry is one that “locks in” customers due to the high effort it takes to move money from one bank to another, especially when it involves investments or mortgages with break fees, long transfer periods, or tons of paperwork. Open banking removes the “gatekeeping” inherent in the banking industry and allows consumers to move their money and loans around more freely to different banks offering more competitive services.

In response to Finance Canada’s January 2019 consultation paper on the benefits and consequences of open banking, Equitable is leading the way within its own ecosystem to exemplify exactly what open banking is, and what the benefits of it are. We already see Equitable moving in this direction while it is actively participating in consultations with the Minister of Finance’s Open Banking advisory panel.

The EQ Bank Mortgage Marketplace is one example. In the Mortgage Marketplace, consumers can choose Equitable, or they can choose a competitor. Equitable is fostering a network that allows customers to transparently see what rates are being offered and facilitates a way for them to consider competitors while on the Equitable website.

Another example is EQ Bank’s enablement of consumers to buy their own GICs. While buying a GIC at a traditional bank is a sophisticated and lengthy process, at Equitable this could be done with a few clicks right on the app.

Equitable believes banking should be easy and they are building the bank of tomorrow. They are even building networks that could potentially drive business away from themselves. While at first this seems counterintuitive, Equitable is just flexing its muscles. Equitable wants open banking because it is the only Canadian bank to have no physical stores, allowing it to offer some of the best savings and borrowing rates Canadians have seen. It is betting on itself, and it believes it would draw many more customers under this more competitive banking environment.

Graphic of Equitable's Mobile AppSource: eqbank.ca

EQ Bank Customer Base (Q3 2021)

Source: Equitable Bank Investor Relations

Payment Modernization

Supporting the potential move to open banking while also being a growth opportunity itself is Equitable’s innovation in payments.

Equitable is investing into upgrading its infrastructure to support a more efficient banking industry that fosters innovation, competition, and growth in Canada.

Additionally, Equitable is working with Payments Canada and industry peers to assess how it can participate in Canada’s real-time payments system, the Real-Time Rail (“RTR”). RTR is an alternative to cash, cheques, and existing digital transfer solutions that would use simple identifiers and clear transactions much quicker than the options that exist today. For example, consumers would not have to worry about a last-minute payment on a bill payment that normally takes 1-2 business days to process.

The removal of these inefficiencies would be a major growth opportunity in Canada that would make doing business easier, ultimately driving lending growth. Equitable is an early adopter – its all-digital platform and relentless focus on digital solutions will likely place it at or near the top of the Schedule I banks when these innovative solutions eventually roll out.

The diversification into new initiatives is a major growth opportunity for Equitable as a competitive bank with a high-return profile, low-cost structure, and an itch to improve the Canadian consumer’s banking experience.

The Unstoppable Housing Market

Although Equitable’s asset mix is diversifying at a steady pace, its portfolio is still heavily loaded with residential real estate exposure. Therefore, the most significant macro trend that could make or break Equitable is the health of Canada’s housing market and the lending that comes with it.

Canada’s housing market is experiencing a few structural demographic changes – some natural, some a result of government policy – that should uphold strong demand for single- and multi-family housing units.

Canada’s federal government released in late 2020 its planned permanent resident admissions into the country between 2021 – 2023. The government aims to introduce 401,000, 411,000, and 421,000 permanent residents into Canada in 2021, 2022, and 2023, respectively. In contrast, Canada accepted about 300,000 immigrants per year from 2015 until the COVID-19 pandemic began.

Currently, millennials (ages 25 – 40 today) are part of the largest age group (ages 25 – 44) in Canada, comprising almost 30% of the population. Millennials are in or around their prime years for a first-home purchase, which stands in the mid-30s on average.

Resident Population of Canada in 2020, by age group (M)

Sources: Statista, Statistics Canada

A consistent flow of immigration and pent-up demand from first-time millennial home buyers over the next decade should increase demand for housing while also increasing home prices. In other words, not only will the residential mortgage debt outstanding in Canada continue rising as straight as a line can be, but upward price pressures on housing will increase the debt per capita (i.e., per person).

Unfortunately for consumers, higher home prices mean mortgages are a near-certainty. It also means it may be difficult for the aggregate population to deleverage (i.e., reduce one’s debt) without selling the asset, which in this case is one’s home.

Canada’s growing home unaffordability stemming from income growth not keeping up with house price growth should not change mortgage demand substantially, either. If the general population increasingly prefers rental units, investors will purchase properties and many of them use mortgages as well.

It appears unless a housing demand fallout occurs, demand for mortgages will continue to grow at a steady pace. We believe Equitable will remain competitive against other Schedule I banks in this frenzy due to:

  • Equitable’s low mortgage rates due to its inexpensive digital footprint;

  • growing customer outreach through partnerships, broker relationships, and digital platform penetrating underserved regions; and

  • growth in the EQ Bank Mortgage Marketplace increasing viewership of Equitable’s low rates.

Shareholders First

On the operational side, new digital initiatives that serve customers better come first. On the capital allocation side, the shareholder comes first.

Equitable’s capital allocation priorities are clear and simple. Health of the business and prudent debt management come first, as they should. Without a healthy balance sheet, the rest of its capital management policies would fall apart.

Next, Equitable looks to increase dividends at high rates to entice shareholders to stick around and act as business owners. Management’s guidance for dividends increases currently stands at a high 20 – 25% increase per year over the next few years.

Once shareholders are paid, Equitable targets “attractive” acquisition opportunities with high ROE potential and growth and diversification initiatives that hit a certain return threshold. Presumably, this means initiatives that uphold or expand ROE figures.

After dividends, acquisitions, and reinvestments, capital will be returned to shareholders if there are no growth opportunities remaining.

Equitable's Capital Management FrameworkSource: Equitable Bank 2020 Annual Report

We believe Equitable is following a prudent and effective shareholder-first capital management strategy that is in line with long-term thinking that benefits consumers and shareholders.

Historical ROE showcases the power of this strategy. Equitable’s ROE performance vs. other Schedule I peers show an even rosier story – it generates superior returns to the average Schedule I banks that are household names for most Canadians. Between 2016 and 2020, Equitable has delivered an average ROE of 15.4% versus the Schedule I peer average of 13.7%.

Risks

Housing Market Gearing

Most of Equitable’s assets are tied to the housing market in some capacity. Additionally, many of its loans are made to non-prime clients who may be at higher risk of failing to make payments during financial hardship. This exposes Equitable to significant downside in market downturns or economic recessions, especially if they are not accommodated by federal income support or other fiscal and monetary stimulus efforts.

Government Regulation

Equitable, as a Schedule I bank, faces substantial regulatory oversight that could prevent it from conducting business in a manner consistent with its growth strategy. Rising house prices in Canada are also attracting lots of political attention. Depending on the federal party in power at any given point in time, there are many ways – some more significant than others – that could cool the housing market and hurt Equitable’s core business.

Partnership Reliance

Equitable is reliant on many key partners to conduct its core business and offer compelling new products at attractive rates. The breakdown of any of these relationships could potentially destroy its client base as Equitable would likely be left with no viable internal alternatives under its current suite of products.

Bottom Line

Equitable is a high-class company with durable competitive advantages that allow it to take advantage of growth opportunities in the Canadian banking industry. Having only recently become a Schedule I bank, Equitable has had tremendous growth amid evolving and diversifying its portfolio away from what many would consider “risky” or “subpar”.

The company today is a quality one with an exceptional credit profile and risk management. Equitable is also leading efforts in open banking and payments modernization, two areas that would change the way Canadians move money for generations on end. We believe Equitable is a viable alternative to the financial “darlings” that sit in many Canadian dividend portfolios, like TD, RBC, and CIBC.

    Join our stock investing newsletter

    Investing articles and ideas in your inbox

    We won't send you spam. Unsubscribe at any time.