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Canadian housing not 'universally weak' as growth slows: EQB CEO - BLOOMBERG

AUGUST 11, 2022

The chief executive of EQB Inc. isn’t ready to paint all of Canada with the same brush when it comes to describing the outlook for housing markets as interest rates put a chill on home sales activity.

“We're seeing more strength out west, you know, probably associated with higher commodity prices and so on — more confidence in the Calgary and Edmonton markets, where we've had a strong historical presence,” said Andrew Moor, who also serves as president of the bank known for its branchless business model, in an interview Wednesday.

”So it's not universally, you know, weak across the country. But certainly we think the big market of Ontario is going to soften a little bit as we see interest rates rise.”

The most recent data available from some of those markets confirms the softening is afoot. The Calgary Real Estate Board last week said July sales slipped 2.6 per cent year-over-year, or 21 per cent on a non-seasonally adjusted sequential basis. Meanwhile, the Toronto Regional Real Estate Board said that home sales in July sank 47 per cent year-over-year. Compared to June, sales were down 24.1 per cent, or 0.3 per cent on a seasonally-adjusted basis.

Amid the murkier outlook, EQB said when it reported second-quarter results late Tuesday that it “prudently dialed back” loan to value ratios and “refined lending assessments” in the Greater Toronto Area’s so-called 905 region, which includes municipalities including Mississauga and Hamilton.  

“This is the way we practice our underwriting. We’re always looking for the areas we think might be the riskiest and making sure that our loan book is in good shape. So the kinds of areas that we're tightening are the areas that are furthest from the city centers — which saw the highest price escalation over the last two to three years in the face of COVID.”

EQB’s stock came under pressure Wednesday after the company said its profit tumbled in the second quarter on the back of mark-to-market losses on its exposure to financial technology firms and other strategic investments.

The company, which was previously known as Equitable Group Inc., said its net income fell 17 per cent year-over-year to $58.8 million in the three-month period ending June 30. On an adjusted basis, it earned $1.75 per share. The average estimate among analysts tracked by Bloomberg was for $2.18 in adjusted per-share profit.

The big drag for EQB in the quarter was non-interest income swinging into negative territory, with a loss of $2.5 million, compared to $16.9 million in income a year earlier. In a release, the company said it booked $8.7 million in mark-to-market losses on an investment portfolio that it said was designed to "gain exposure to innovative business models and early-stage technologies."

On a conference call with analysts Wednesday, EQB Chief Financial Officer Chadwick Westlake said the downturn for some of those strategic investments — which he identified as including Wealthsimple, Portage funds, and Framework Venture funds — played out as he previously anticipated and telegraphed to the market. He added that EQB is still “enthusiastic” about those investments.

In the interview, Moor said EQB has made about $35 million in fintechs over the years.  

Credit quality was another drag on profit in the latest quarter, as EQB took $5.2 million in provisions for credit losses. By contrast, the company released funds from its provisions in the prior and year-ago quarters.

While its portfolio of single-family alternative loans jumped 35 per cent year-over-year to $16.3 billion, EQB cautioned that growth is expected to cool down in the second half of this year.

There was continued growth in the company's retail banking unit in the quarter, as EQ Bank's customer base jumped 26 per cent year-over-year to 279,939. That helped propel the unit's deposit base 16 per cent higher to a record $7.6 billion.

EQB reaffirmed its financial forecasts for the year, and said its board authorized a seven per cent dividend hike, taking the quarterly payment to $0.31 per share, as of Sept. 30.

“The slowing housing market could weigh on investor sentiment in the short term pending further clarity, but the shares are trading at 1.0x [price to book value] and we think that with EQB’s solid track record of growth and profitability, the shares are attractively valued, particularly for investors with a longer-term investment horizon,” wrote Geoffrey Kwan, an analyst at RBC Capital Markets, in a report to clients. He trimmed his 12-month price target on EQB to $74.00 from $75.00, and maintained his outperform recommendation (the equivalent of a buy).


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