News

Full-Year 2022 Guidance for Key Metrics Confirmed

TORONTO, Aug. 9, 2022 /CNW/ - EQB Inc. (TSX: EQB) (TSX: EQB.PR.C) (TSX: EQB.R) (EQB) today reported earnings for the three and six months ended June 30, 2022 that reflected strong Q2 performance in core operations including record quarterly net interest income but with revenue growth offset at the bottom line by mark-to-market and fair value adjustments to non-interest income due to the impact of significant declines in North American equity markets on its strategic investment and security portfolios.  

Core Personal and Commercial business performance in Q2 featured conventional lending growth of 36% year over year, adjusted quarterly net interest income² up 18%, margins in line with 2022 guidance and fee-based income up 41%. However, after reflecting the decline in non-interest income, Q2 adjusted earnings² were held to $1.75 diluted and adjusted ROE² was 12.1%. EQB deploys capital to strategic fintech investments to gain access to early-stage technologies and innovative business models. Changes in their fair value and other derivatives are not indicative of core business performance.

"EQB's core businesses delivered strong, on-plan performance despite market headwinds that impacted second quarter non-interest income in the form of mark-to-market adjustments. In alignment with our ROE targets, we generated risk-managed growth in our now $24 billion conventional loan¹ portfolios of 36% year over year and 7% since March. Consistent with our established risk management practices, we also continued to proactively adjust our underwriting approach across the business to respond to elevated risks from inflation, the Bank of Canada's response to inflation and our expectations of changing collateral values. That said, as we exited the quarter, the fundamental forces that provide a solid foundation for our business – including strong demand for housing in Canada's major urban centers fueled by population growth, and our distinctive position as Canada's Challenger Bank –  remain firmly in place," said Andrew Moor, President and CEO. "Priorities for the current quarter include the introduction of EQ Bank's payment card, the launch of EQ Bank in Québec and readying ourselves to acquire Concentra Bank which will add significant scale and opportunity to serve more Canadians."

Record YTD performance has EQB on track to meet 2022 guidance

• Although growth in conventional asset originations is expected to moderate in the second half of 2022 on risk-managed actions taken by EQB over the first two quarters, EQB today expressed confidence in stated annual guidance for the full-year 2022 of +12-15% in total lending portfolio growth (YTD 21%), +8-10% adjusted EPS² growth (YTD +10%), adjusted ROE² of 15%+ (YTD 15.6%), adjusted pre-provision, pre-tax income² +12% (YTD +12%), book value per share +12% (YTD +16%) and CET1 13%+ (June 30, 2022 13.5%)
• Guidance was reaffirmed based on outperformance in the first half of 2022, and will be supported by EQB's asset diversification and pricing strategies and the potential that rising interest rates will increase mortgage renewal and retention

Net interest income moves higher with stable margins

• Q2 adjusted net interest income² +18% y/y to $167.6 million (+17% or $166.7 million reported) driven by growth in average asset balances
• Q2 adjusted net interest margin² (NIM) of 1.81% (1.80% reported) was on target with 2022 guidance (flat to 2021), primarily reflecting growth in higher-yielding conventional loans¹ but with lower prepayment income
• Full-year 2022 outlook for NIM expected to remain stable with an anticipated decline in prepayment income brought on by rising interest rates offset by asset diversification, pricing strategies and continued funding diversification

Non-interest income reflects mark-to-market, fair value adjustments

• Q2 fees and other income +41% y/y to $7.9 million reflecting growth in loan portfolio and origination/servicing fees
• Severe capital market volatility led to mark-to-market losses of $8.7 million on EQB's strategic investment portfolio. This portfolio was conceived and constructed to enable EQB's subsidiary, Equitable Bank to gain exposure to innovative business models and early-stage technologies that are accretive to Equitable Bank's position as Canada's Challenger Bank
• EQB expects volatility to continue in the second half of 2022, but this does not reflect the underlying strategic value of these investments
• EQB expects fees and other income to increase in line with the total portfolio and gains on securitization activity to remain stable or increase relative to Q2 2022
• Q2 gains on securitization income were $2.2 million compared to $8.6 million a year ago due to decreased derecognition volumes and a decline in gain-on-sale margin from historically high levels; EQB expects to see a modest recovery in such income in the last half of 2022

Continued investment in Challenger innovations across people, process, and platforms

• Adjusted non-interest expenses¹ in Q2 +16% y/y to $75.6 million driven by growth in assets and investments in capabilities to advance EQB's strategic innovation agenda; management continues to expect operating leverage in 2022 to be flat on average
• YTD, EQB's banking operations remain the most efficient of any Canadian bank at 41.1% adjusted efficiency ratio¹ (43.6% reported), but elevated in Q2 to 45.8% adjusted¹ (47.7% reported), due primarily to the reduction in total quarterly revenue driven by mark-to-market and fair-value losses

Personal Banking asset growth +19% y/y to record $24.0 billion  

• Single-family alternative portfolio +35% y/y and +6% q/q to $16.3 billion (2022 annual guidance +12-15%) supported by higher originations and a 1.9% decline in the loan attrition rate
• Single-family alternative growth expected to slow in the latter half of 2022, reflecting market conditions
• Reverse mortgage assets +231% y/y to $421 million and +38% q/q (2022 annual guidance +150%) reflecting expanded distribution and increasing brand awareness of Equitable Bank as an attractive provider of reverse mortgages to Canadians nearing or in retirement as well as growth in this market
• Insurance lending (CSV) +95% y/y to $73 million and +24% q/q (2022 annual guidance +100%) as growth was assisted by partnerships with nine leading insurers and the recent introduction of Immediate Financing Arrangement, a product available to whole life insurance policy holders to immediately access 100% of their total annual premium as equity

Commercial Banking asset growth +25% y/y to $12.1 billion

• Commercial Finance Group loan portfolio +28% y/y and +10% q/q to $4.5 billion (2022 annual guidance +10-15%), Business Enterprise Solutions +22% y/y and +6% q/q to $1.2 billion (2022 annual guidance +10-15%) and Specialized Finance +107% y/y and +3% q/q to $739 million (2022 annual guidance +20-30%)
• Equipment leasing portfolio +40% y/y and +17% q/q to approximately $900 million (2022 annual guidance +10-15%) with 67% of new assets comprised of high credit-quality prime leases
• Insured Multi-unit residential portfolio +15% y/y and +14% q/q to $4.8 billion (2022 guidance 0-5%)

Strong capital and liquidity positions

• Liquid assets¹ were $3.1 billion or 7.8% of total assets at June 30, 2022, a prudent level that reflects anticipated cash needs for upcoming quarters, compared to $2.9 billion or 9.1% a year ago when pandemic-related uncertainties were much higher
• Retail and securitization funding markets remain liquid and efficient and with rising interest rates deposit markets are expected to see even more positive inflow
• Equitable Bank's Common Equity Tier 1 ratio was 13.5% at June 30, 2022 (unchanged from March 31, 2022) and compared to 14.4 % at June 30, 2021, reflecting its success in deploying capital organically
• Total risk-weighted assets +29% y/y and +5% q/q to $14.8 billion

Credit quality indicators reflect long-term prudence, risk management responsiveness

• PCL was $5.2 million in Q2 2022 due to portfolio growth and as macroeconomic forecasts and loss modelling considered the impact of rising interest rates and geopolitical tensions compared to a net benefit of $2.0 million in Q2 2021 when future expected losses recorded in 2020 were released because of improving macroeconomic variables
• Allowances now approximate pre-pandemic levels and PCL is expected to be consistent with Q2 levels and grow with the size of the portfolio assuming economic forecasts prove to be accurate
• Net impaired loans declined to 0.18% of total assets at June 30, 2022 from 0.41% at June 30, 2021 – reflecting net reductions across single family mortgages ($17.5 million), conventional commercial loans ($36.7 million), and equipment leases ($2.7 million) over the past 12 months – and also declined from 0.22% at March 31, 2022 due to the discharge of one delinquent commercial loan
• EQB is well reserved for credit losses with allowances as a percentage of total loan assets of 14 bps at June 30, 2022 compared to 19 bps at June 30, 2021
• Realized losses were less than 1 basis point of total loan assets or $2.4 million YTD – better than its industry-leading 10-year credit history – compared to $6.6 million or 2 basis points a year ago

Equitable Bank continued to diversify its sources of funding and optimize costs of funds

• During the second quarter (May 27, 2022), Equitable Bank completed its second legislative covered bond issuance of €300 million. Due May 27, 2025, the bonds were issued with an AA rating at a spread of 20 basis points over EUR mid swaps and are listed on the Irish Stock Exchange (Euronext Dublin)
• Equitable Bank plans a series of covered bond issuances and expects its capacity for such issuances to increase when the agreement to acquire Concentra Bank closes. Inclusive of all costs, the bonds represent Equitable Bank's lowest cost of wholesale funding
• Excluding EQ Bank deposits, Equitable Bank's total other deposit principal was +34% y/y and +8% q/q to $15.9 billion at June 30, 2022 and included its Deposit Note program of $1.9 billion

EQ Bank deposits +16% y/y to record $7.6 billion with attractive economics

• EQ Bank expanded its customer base by +26% y/y to 279,939 (with nearly 14,000 new customers in the second quarter alone) and during July, increased its customer base to approximately 285,000
• As more Canadians take advantage of EQ Bank's best-in-class digital experience and increase product usage (as they did with +80% y/y growth in digital transactions in Q2 and +6% growth in products held per customer/y), EQ Bank is benefiting from improved economics as customer lifetime value grows with rising alternative funding, while customer acquisition costs remain stable, even while EQ Bank pays competitive deposit rates with no everyday fees
• EQ Bank deposits +16% y/y and +5% q/q (2022 annual guidance +20-30%) to $7.6 billion

EQ Bank poised to introduce payment card, serve customers in Québec

• This fall will see the introduction of the EQ Bank payment card, which will allow customers to make purchases wherever Mastercard are accepted. This payments experience will complement current offerings and the new functionality will allow Canadians to use EQ Bank for the majority of their day-to-day banking needs as a primary bank
• EQ Bank services are also coming to Québec this fall, an important step for EQB, which has proudly served Québec customers through the brokered deposit and brokered mortgage channels for many years and has participated in the local economy as an employer of talented Challengers in its Montréal office since 2010

Equitable Bank continues to prepare for the closing of the Concentra Bank acquisition

• On February 7, 2022, Equitable Bank announced that it entered into a definitive agreement, as well as supporting agreements, to acquire Concentra Bank, Canada's 13th largest Schedule I bank by assets, subject to customary closing conditions and regulatory approvals
• During the second quarter, Equitable Bank received unconditional clearance from the Competition Bureau Canada in the form of an advance ruling issued in connection with the acquisition
• Equitable Bank and Concentra Bank have jointly formed a Transformation Management Office with dedicated resources to develop detailed integration plans in advance of closing while both banks continue to operate independently in serving customers

EQB announces +7% q/q increase in Common Share Dividend or +68% y/y

• EQB's Board of Directors declared a common share dividend of $0.31 per common share or $1.24 annualized, payable on September 30, 2022 to shareholders of record September 15, 2022
• The three dividend increases announced since the beginning of 2022 reflect EQB's philosophy of growing the dividend while maintaining a payout ratio that is much lower than other Canadian banks and using retained capital to fuel portfolio growth with high future ROE
• EQB's Board also declared a quarterly dividend of $0.373063 per preferred share, payable on September 30, 2022 to shareholders of record at the close of business September 15, 2022
• EQB dividends are designated as eligible dividends for the purposes of the Income Tax Act (Canada) and any similar provincial and territorial legislation

Normal course issuer bid (NCIB)

• EQB'sNCIB allows it to repurchase up to 2,325,951 of its common shares and 289,340 of its non-cumulative 5-year reset preferred shares Series 3, representing approximately 10% of its public float as at December 10, 2021 prior to December 10, 2022. During Q2, EQB repurchased and cancelled 7,600 preferred shares at an average price of $24.93. No common shares were purchased during the first six months of 2022

"What is important to us is to drive results in our core personal and commercial business lines. In this regard, we have identified high-quality opportunities short and long term where our risk-managed capital allocation decisions will position EQB to continuously achieve our ROE target of 15% to 17%. From the perspective of our strategic investment portfolio, market-driven fluctuations reflected in the second quarter do not change the business value of these investments as they give us access to leading-edge knowledge, technologies and capabilities and, as recently as Q1, allowed us to capture significant gains. Putting all the component pieces of our outlook together, we look forward to proving the resiliency of our business model and consistency of our Challenger purpose through this next stage of the economic cycle while delivering on our full-year guidance," said Chadwick Westlake, EQB's Chief Financial Officer.

Analyst conference call and webcast: 8:30 a.m. ET Eastern August 10, 2022
EQB will host its second quarter conference call and webcast on Wednesday August 10, 2022.  To access the call live, please dial (416) 764-8609 five minutes prior to the start time. The listen-only webcast with accompanying slides will be available at eqbank.investorroom.com/events-webcasts.

Call archive
A replay of the call will be available until August 24, 2022 at midnight at (416) 764-8677 (passcode 542700 followed by the number sign). Alternatively, the webcast will be archived on EQB's website.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated balance sheets (unaudited)

Consolidated statements of income (unaudited)

Consolidated statements of comprehensive income (unaudited)

Consolidated statements of changes in shareholders' equity (unaudited)

Consolidated statements of changes in shareholders' equity (unaudited)

Consolidated statements of cash flows (unaudited) 

About EQB Inc.

EQB Inc. trades on the Toronto Stock Exchange (TSX: EQB, EQB.PR.C and EQB.R) and serves more than 360,000 Canadians through its wholly owned subsidiary Equitable Bank, Canada's Challenger Bank™. Equitable Bank has a clear mandate to drive change in Canadian banking to enrich people's lives. Founded over 50 years ago, Equitable Bank provides diversified personal and commercial banking and through its EQ Bank platform (eqbank.ca), it has been named the top Schedule I Bank in Canada on the Forbes World's Best Banks 2022 and 2021 lists. Please visit equitablebank.ca for details.

Cautionary Note Regarding Forward-Looking Statements

Statements made by EQB in the sections of this news release, in other filings with Canadian securities regulators and in other communications include forward-looking statements within the meaning of applicable securities laws (forward-looking statements).  These statements include, but are not limited to, statements about EQB's objectives, strategies and initiatives, financial performance expectations and other statements made herein, whether with respect to EQB's businesses or the Canadian economy.  Generally, forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "planned", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases which state that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved", or other similar expressions of future or conditional verbs.  Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, closing of transactions, performance or achievements of EQB to be materially different from those expressed or implied by such forward-looking statements, including but not limited to risks related to capital markets and additional funding requirements, fluctuating interest rates and general economic conditions, legislative and regulatory developments, changes in accounting standards, the nature of our customers and rates of default, and competition as well as those factors discussed under the heading "Risk Management" in the MD&A and in EQB's documents filed on SEDAR at www.sedar.com.  All material assumptions used in making forward-looking statements are based on management's knowledge of current business conditions and expectations of future business conditions and trends, including their knowledge of the current credit, interest rate and liquidity conditions affecting EQB and the Canadian economy.  Although EQB believes the assumptions used to make such statements are reasonable at this time and has attempted to identify in its continuous disclosure documents important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended.  Certain material assumptions are applied by EQB in making forward-looking statements, including without limitation, assumptions regarding its continued ability to fund its mortgage business, a continuation of the current level of economic uncertainty that affects real estate market conditions, continued acceptance of its products in the marketplace, as well as no material changes in its operating cost structure and the current tax regime.  There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.  Accordingly, readers should not place undue reliance on forward-looking statements.  EQB does not undertake to update any forward-looking statements that are contained herein, except in accordance with applicable securities laws.

Non-Generally Accepted Accounting Principles (GAAP) Financial Measures and Ratios

In addition to GAAP prescribed measures, this news release references certain non-GAAP measures, including adjusted financial results, that we believe provide useful information to investors regarding EQB's financial condition and results of operations. Readers are cautioned that non-GAAP measures often do not have any standardized meaning, and therefore, are unlikely to be comparable to similar measures presented by other companies.

Adjusted financial results

On February 7, 2022, Equitable Bank announced that it entered into a definitive agreement to acquire a majority interest in Concentra Bank (Concentra), subject to customary closing conditions and regulatory approvals, and is expected to close later in 2022. As a result of the announced agreement, Equitable Bank has incurred certain acquisition costs beginning in Q4 2021.  To enhance comparability between reporting periods, increase consistency with other financial institutions, and provide the reader with a better understanding of EQB's performance, adjusted results were introduced starting in Q1 2022. Adjusted results are non-GAAP financial measures.

Adjustments impacting current and prior periods:

Concentra acquisition/integration costs, pre-tax:

• Q2 2022 – $2.7 million of acquisition and integration related costs and $0.9 million of interest expenses paid to subscription receipt holders¹; and
• Q1 2022 – $5.1 million of acquisition and integration related costs and $0.9 million of interest expenses paid to subscription receipt holders.

The following table presents a reconciliation of GAAP reported financial results to non-GAAP adjusted financial results.

 

In addition to the adjusted results that are presented above, additional adjusted financial measures and ratios are disclosed as follows:

•  Reconciliation of adjusted efficiency ratio

• Reconciliation of adjusted return on equity (ROE)

Other non-GAAP financial measures and ratios

• Assets under management (AUM): is the sum of total assets reported on the consolidated balance sheet and loan principal derecognized but still managed by EQB.

• Conventional loans: are the total on-balance sheet loan principal excluding Prime single family and Insured multi-unit residential mortgages.

• Liquid assets: is a measure of EQB's cash or assets that can be readily converted into cash, which are held for the purposes of funding loans, deposit maturities, and the ability to collect other receivables and settle other obligations.
• Loans under management (LUM): is the sum of loan principal reported on the consolidated balance sheet and loan principal derecognized but still managed by EQB.
• Net interest margin (NIM): this profitability measure is calculated on an annualized basis by dividing net interest income by the average total interest earning assets for the period.
• Pre-provision pre-tax income: is the difference between revenue and non-interest expenses.