Equitable reports record earnings, sees reverse mortgages soar 262%
Despite a slowing housing market at the end of the first quarter, Equitable Group posted its best-ever quarter with net income up 27% on strong origination growth.
It also expects strong growth to continue into 2022, due to a variety of factors.
“…we are not the market, and we do expect our own momentum to continue into our traditionally busy spring and summer months,” said Chief Financial Officer Chadwick Westlake.
President and CEO Andrew Moor explained this is partly due to diversification. “Equitable got out of the starting gate quickly this year as part of our strategy to grow higher-margin conventional assets and further diversify our balance sheet, translating into the best quarterly earnings performance in our history.”
The earnings call also touched on the fact EQ Bank was voted Canada’s top Scheduled I bank by Forbes last month for the second year running, along with Equitable’s reverse mortgage growth of over 262%.
Highlights from the Q1 earnings report
Q1 net income: $88 million (+27% YoY)
Assets under administration: $43.4 billion (+18%)
Loan originations: $3.5 billion (+29%)
Net interest margin: 1.86% (+9 bps)
Reverse mortgage loans: $247 million (+325%)
Notables from its call
Moor made the following comments on a variety of subjects:
On Equitable’s reverse mortgage portfolio: “Our reverse mortgage business is a bigger part of the decumulation growth platform, and it, too, is moving ahead rapidly in market share profile of assets with growth of 262% year-over-year as the portfolio surpassed $300 million.”
On the Concentra Bank acquisition: “funding for the purchase is in place. We’ve made requisite submissions for regulatory approval and continue to expect closing in the second half of the year…we recently received approval from the Competition Bureau of Canada, which is an important first step.”
On the bank’s technology innovation, specifically the roll-out of a new EQ Bank account opening process using informed artificial intelligence to enable customers to verify their government-issued ID. “We’ve long sought to reduce friction in digital account openings for our customers, and informed AI takes convenience to our whole new level,” Moor said.
On the launch of Equitable Connect in Q1, a cloud-based fulfillment portal that streamlines mortgage document management to brokers. “It improves our visibility and accelerates mortgage approvals,” Moor explained. “The idea for Equitable Connect came from listening to our mortgage broker partners and finding ways to support their efficiency and effectiveness in the market…Because Equitable Connect is cloud-based, it’s accessible anywhere, anytime on any device. That’s important to brokers and our team.”
On plans to launch in Quebec: “…we will be launching Quebec this year…I think probably it’s going to be better in deposits per head of population than the rest of Canada once we get mature. But, obviously, there’s a curve we’ve got to walk out there and build our brand and franchise and show the people and the customers there that we can do well for them we’re excited about that opportunity.” It’s estimated that Quebec has the second-largest household deposit market at $290 billion.
On the impact of rising rates on mortgage demand in the alternative space: “Many or some of our customers might have qualified a year ago in a lower interest environment that won’t qualify going forward…And of course, the Alt market is such a small percentage of the prime market that any shift in those prime flows can have significant leverage on demand, which I think is why…we’re seeing surprisingly good demand.”
On the impact of rising rates on customers’ ability to make their payments: “we actually did a deep dive in this recently…and we got pretty comfortable that within the projected bank changes, there’s a very small percentage of our book that start to get influenced…let’s remember that all these mortgages were qualified for the 2% stress test over and above contract rate or the benchmark rates are significantly higher than our customers are actually paying today. So the thesis is that our customer has got plenty of cushion to absorb these higher rates.”
Chief Financial Officer Chadwick Westlake said that while the bank focused on conventional lending, “the steady performance of our insured multifamily portfolio where assets increased 2% year-over-year also contributes to our revenue diversification, stability and ROE strength.”
Equitable saw an increase of nearly $300 million in deposits in the quarter, while its $12-billion broker deposit business saw double-digit year-over-year growth.
One headwind the bank faces is an expected decline in prepayment income due to rising rates, Westlake noted.
Equitable released a further $100,000 from its credit loss provisions in Q1, a significant reduction from the $1.4 million released from its provisions for credit losses in Q4.
Net impaired loans fell to 22 bps as of Q1, down from 27 bps in Q4 and 36 bps a year ago, “reflecting a reduction of $26.8 million year-over-year in single-family mortgages and a $6.9-million reduction in equipment leases,” Westlake said.
Moor said the bank’s 2022 guidance for its alternative mortgage portfolio is for growth of 12% to 15%.
“It’s evident to all of us on this call that the economic and geopolitical environment has shifted dramatically in the past few weeks to introduce new uncertainties,” Moor said. “Without downplaying these risks…there are important fundamentals still firmly in place to support progress for Canada generally and housing demand specifically, including high employment and immigration.”
Weighing all of these factors and knowing that we have purposely built the bank and our model to prepare for periods like this, I feel that our prospects for growth and performance remain very positive,” Moor added. “In fact, I would say that with an incredible first quarter putting us ahead of target to start 2022 in conventional lending, combined with a strong pipeline of applications and funding commitments…we have good confidence in our existing loan growth guidance and our ability to deliver greater than 15% ROE for 2022.”