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Equitable Bank and First National Q3 earnings

EQB borrowers remain resilient despite renewal rate shock

Despite the shock of sharpy higher rates as their mortgages renew, EQB reports that its clients are continuing to prove resilient.

That includes the bank’s alternative lending portfolio, who are facing rates even higher than the bank’s prime borrowers.

“A very encouraging thing is when you look at the performance of those borrowers within our book that are self-employed,” Andrew Moor, EQB’s President and CEO, said during the bank’s Q2 earnings call. “So, they seem to be a pretty resourceful bunch.”

He attributed the strength among that specific group to the fact that they typically have “more reserves and more capital available to support mortgage payments,” and are often able to take on additional contracts to supplement their income.

While the bank saw the percentage of impaired loans in its personal lending portfolio rise to 0.25%, up 7 bps from the previous quarter and 9 bps compared to last year, Moor added that he remains “pretty relaxed” about the current trajectory.

“I suspect that high mortgage shock is encouraging some people to sell the house and preserve the equity,” he said.

In the past, he said people in that situation may not make the final monthly payment prior to selling the home, knowing that the loan will be paid with the proceeds of the sale, meaning that those delinquencies are “going to resolve quickly.”

While Moor said there are “definitely some challenges to some people [in terms of] interest rate shock,” he notes that current arrears rates remain within historical norms.

Despite the challenging economic conditions, EQB reported its highest-ever quarterly earnings, which were up 88% from last year.

Currently Canada’s seventh-largest Schedule 1 bank, EQB also continued to see its client base grow in the quarter, rising to 367,790, partly due to the bank now offering its services in Quebec.

Highlights from the Q2 earnings report

  • Net income (adjusted): $115.5 million (+88% YoY)
  • Earnings per share (adjusted): $2.98 (+70%)
  • Loans under management and administration: $60 billion (+41%)
  • Single-family alternative portfolio: $30.3 billion (+29%)
  • Net interest margin: 1.99% (+18 bps)
  • Net impaired loans (of total assets): 0.47% (+29 bps)
  • Reverse mortgage loans: $1.025 billion (+143%)
  • Avg. LTV of Equitable’s uninsured single-family residential portfolio: 63% (vs. 65% in Q1)

Source: Q2 earnings report

Notables from its call

CEO Andrew Moor commented on the following topics during the company’s earnings call:

  • On the impact of Bank of Canada rate hikes: “As expected, the 10 bank of policy interest rate increases totaling 4.75% since March of 2022, and the resulting slowdown in the housing market reduced single-form family mortgage application volumes compared to prior periods. At the same time, loans are staying on our books for longer and renewals are stronger as more customers opt to remain in their homes.”
  • On home prices: “The housing market has gone through a correction, and prices are now showing signs of improvement. At the very least, there seems to be a floor under house prices that gives us more confidence in our credit outlook for that part of the book.”
  • On the outlook for loan growth: “With growth of 3% through June, we now expect the bank’s conventional personal lending portfolio to grow 5% to 8% for [Q3]…we expect higher growth next year, a reasonable assumption given the housing market’s fundamentals fuelled by population growth, sub pent-up demand caused by current housing market conditions and presumably by then, more stability in interest rates.”
  • On proposed regulatory changes concerning capital levels: “OSFI recently proposed changes to capital [levels to] address risks related to variable-rate mortgages. EQB has no exposure to these increased capital requirements because we stopped offering [static-payment variable-rate mortgages] 12 years ago, and moved to adjustable rate mortgages, or ARMs, which adjust the payment to keep the amortization of the original terms.”

Chadwick Westlake, SVP and Chief Financial Officer, also commented on the following:

  • On impaired loans: “Impaired loans have continued to increase, but we continue to not expect to lose money on these impairments. Due to growth of the portfolio and the fact that we are at a different point in the credit cycle, our gross impaired loans increased $76.4 million or 49% quarter-over-quarter to $233.3 million.
  • On deposit growth: “Deposits are below our prior targets, but that’s the outcome of steering away from short-term competitor promotions and instead focusing on leveraging all of our various funding levers while yielding the long-term value of the bank with a customer lifetime value to acquisition cost ratio of at least seven to 10 times. We now expect EQ deposit growth of 5% to 10% for the 10-month period ending in October with an uplift from our new FHSA more to come after small business launches in EQ Bank.”

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.