EQ Bank Emerges as Top-Performing Canadian Banking Stock in 2023, Anticipates Continued Growth in 2024

In a challenging year for Canadian banks, EQB Inc (EQB.TO), a mid-sized lender, emerged as the best-performing banking stock in 2023, witnessing a remarkable surge of over 50% in its shares on the back of solid earnings growth. The Toronto-based digital bank, known as EQ Bank, has set itself apart with its unique approach – operating without physical branches, which has proven beneficial in maintaining cost efficiency, especially when larger institutions have grappled with inflated cost bases, leading to job cuts.

As the seventh-largest bank in Canada, EQ Bank achieved an impressive 11.2% growth in adjusted net income for the last fiscal year, while major banks experienced varied results, ranging from 0.7% growth to a significant 23% fall in earnings. Notably, EQ’s non-interest expenses rose by 15.5%, a relatively moderate increase compared to the top three banks – CIBC, National Bank of Canada, and Scotiabank – where expenses surged over 20%. The larger institutions resorted to measures such as layoffs to control costs.

One of the key drivers behind EQ’s success is attributed to its attractive mortgage products, coupled with its strategic C$495 million acquisition of Concentra Bank in 2022. This acquisition is seen as a crucial element that is expected to contribute significantly to EQ Bank’s future earnings. Shareholders are optimistic that the bank’s market share will continue to grow, supported by its challenger bank mentality and effective marketing strategies.

Maxime Robillard, an analyst at Van Berkom Global Asset Management, which holds EQ shares, expressed his anticipation of growing investor interest in EQ Bank. He mentioned that it would increasingly be on investors’ radar due to their market share gains and the promotion of a challenger bank mentality through enhanced marketing. He also believed that this would result in attracting more investment.

While CIBC and National Bank experienced respective share increases of 16% and 11% in 2023, EQ Bank outperformed them with an impressive 53.7% rally. Despite this substantial growth, EQ’s stock is traded at a price-to-earning ratio of 8.07, in contrast to RBC’s 12.78 and TD’s 15.29. This lower valuation offers investors hope that the upward momentum in EQ’s stock has the potential to continue.

However, it’s essential to acknowledge that EQ remains a relatively small player in Canada’s concentrated banking sector, where the top six lenders control over 90% of the assets. The bank’s market value of C$3.3 billion is considerably less than the C$4.1 billion profit earned by industry leader Royal Bank of Canada in its latest quarter.

Apart from cost-cutting initiatives, major banks allocated funds to address potential bad debts amid economic uncertainties. EQ Bank’s provisions grew at a slower pace than the industry average. CEO Andrew Moor highlighted the importance of advertising campaigns and technology investments, emphasizing that these efforts will boost the bank’s customer base by about 30%-40% from its current level of over 550,000.

While EQ Bank’s strategic focus aligns with the trend towards a great digital experience, Moor acknowledged the challenges in convincing customers to switch banks. Approximately 80% of Canadians continue to bank where their parents did, creating a hurdle for EQ. However, the bank’s strategy involves attracting the younger generation through appealing interest offerings, such as a 3% rate for depositing payroll, and emphasizing the ease of everyday banking.

Looking ahead to 2024, EQ’s strategic priorities include tapping into small businesses, an underserved segment according to Moor. He stated, “We’re going to come up with a challenger bank approach to really providing great services to small businesses.”

Forecasts for EQ’s net income in fiscal 2024 indicate a robust 30% growth, according to LSEG data. This compares favorably to earnings forecasts for major banks, which range between a 4.9% fall and a 1.8% rise. EQ shareholders, such as Anthony Visano, Managing Director at Kingwest & Co, express enthusiasm about the bank’s potential, stating, “There is a lot that they (EQ) can do with their digital banking customers… We occasionally get excited about that.” The trajectory of EQ Bank in 2023 positions it as a noteworthy player in the Canadian banking landscape, with shareholders and investors closely monitoring its growth potential in the coming years.