EQB Inc. (EQB:CA) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights strong financial performance, with increased dividends and share repurchases, and a 10% growth in loans under management. The Q&A reveals positive sentiment, with management providing optimistic guidance on loan impairments and cost savings. Despite some vague responses on future losses, the overall tone is upbeat, supported by strategic focus on profitable loans and growth in the credit card portfolio. The combination of these factors suggests a positive stock price movement.
Key Financial Performance
Total loans under management Achieved 10% year-over-year growth, driven by strong 36% year-over-year growth in off-balance sheet CMHC insured multi-unit residential mortgage business. The growth was attributed to strategic focus on this segment.
EQ Bank customer growth Achieved 18% year-over-year growth in customers and 10% growth in deposits, with deposit balances ending the year at nearly $10 billion. Growth was driven by the bank's strong digital offerings and competitive products.
Small business banking deposits Reached $140 million in business deposits by the end of October, shortly after launching the small business banking offering in October. This was achieved before significant marketing efforts.
Net interest margin (NIM) Expanded 4 basis points sequentially to 2.01% in Q4. The improvement was due to lower funding costs and a shift towards higher-yielding uninsured mortgages.
Diluted EPS (Q4 2025) $1.53, reflecting a decline due to lower revenues, expense growth, and higher provisions for credit losses.
Return on Equity (ROE) (Q4 2025) 7.5%, reflecting lower revenues, higher expenses, and increased provisions for credit losses.
Provisions for Credit Losses (PCLs) Higher in Q4, driven by macroeconomic variables and deterioration in forward-looking indicators. PCLs were $7.8 million in personal, $11.8 million in commercial, and $0.2 million in equipment financing.
Gross impaired loans Increased 7% quarter-over-quarter to $871 million, driven by macroeconomic conditions and credit migration in personal and commercial lending.
Allowance for Credit Losses (ACL) rate Increased to 41 basis points, up 8 basis points sequentially and 9 basis points year-over-year, driven by an increase in performing allowance.
Net interest income (NII) $265 million, down 2% year-over-year but up 1% sequentially. Sequential growth was due to lower funding costs and a shift towards higher-yielding uninsured mortgages.
Noninterest revenue $43.5 million, down 15% year-over-year and 9% sequentially, largely due to hedging activities and lower gains on sale from securitization activities.
Noninterest expenses Increased by 11% year-over-year, driven by growth-related investments, higher premises costs, and Challenger staff expenses.
Efficiency ratio Increased by 570 basis points year-over-year, reflecting higher expenses and modest revenue growth.
Dividend per share Increased to $0.57 per share in Q4, up from $0.55 last quarter and $0.49 last year, reflecting a strong track record of dividend increases.
Share repurchases Repurchased a record 731,000 shares in Q4 as part of the strategy to return capital to shareholders.
Loans under management (LUM) Increased 10% year-over-year to $74.5 billion, with strength in multiunit residential portfolio. Growth was achieved despite intentional pullback from certain portfolios.
Deposits Balances increased 9% year-over-year to $36.1 billion, driven by strong growth in EQ Bank's demand deposits, which increased 38% year-over-year.
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Operating Highlights
Small Business Banking Offering: Launched in October with features like fully digital account opening, competitive interest rates, business GICs, and no monthly fees. Achieved $140 million in business deposits by the end of October.
Reverse Mortgages: Enhancements launched to increase competitiveness while maintaining strong risk management.
EQ Bank Product Shelf: Focused on completing the product shelf, including payments and wealth management, with integration of PC Financial.
PC Financial Acquisition: Acquisition and partnership with Loblaw expected to be transformative, enhancing market presence and product offerings.
Multi-Unit Residential Portfolio: Achieved 36% year-over-year growth, supported by increased CMB issuance limit to $80 billion.
EQ Bank Growth: Achieved 18% year-over-year growth in customers and 10% growth in deposits, with balances nearing $10 billion.
Restructuring Program: Implemented with a $92 million pretax charge, expected to save $45 million annually starting in 2026.
Efficiency Improvements: Focused on cost control and achieving a low 50s efficiency ratio in 2026.
Net Interest Margin (NIM): Expanded by 4 basis points sequentially to 2.01% in Q4.
Focus on Core Franchise: Prioritizing single-family lending, reverse mortgages, and multi-unit residential portfolios.
Digital and AI Investments: Investing in AI enablement and digital platforms to enhance efficiency and customer experience.
Open Banking Advocacy: Positioned as a supporter of open banking, aligning with Federal budget initiatives for a consumer-driven banking system.
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Risk or Challenges
Macroeconomic Environment: The macroeconomic environment, including a soft housing market, rising unemployment, and economic uncertainty, has negatively impacted EQB's financial performance, including higher provisions for credit losses and lower revenues.
Credit Risk: Higher provisions for credit losses (PCLs) were reported, driven by deterioration in forward-looking indicators and macroeconomic variables. Impaired loans increased, particularly in single-family residential and commercial lending, with specific challenges in Toronto and surrounding suburbs.
Efficiency and Cost Management: The efficiency ratio increased, and operating leverage was negative due to higher expenses and investments. A restructuring program was implemented to address cost pressures, but its benefits will only be realized in 2026.
Funding Costs and Margins: Funding costs remain a challenge, with the need to dynamically adjust interest rate offerings to balance growth and profitability. Margins have been under pressure but showed slight sequential improvement.
Commercial Loan Growth: Commercial loan growth is tied to broader economic confidence, which remains uncertain. Resolution timelines for commercial loans are elongated, adding to credit risk.
Housing Market Dependency: Over 60% of on-balance sheet loans are single-family residential, making EQB highly dependent on the housing market. Weakness in housing prices, particularly in Toronto, poses a risk to credit quality and revenue growth.
Regulatory and Capital Constraints: The bank faces competitive disadvantages due to standardized capital treatment and regulatory constraints, which impact its ability to achieve industry-leading ROE.
Strategic Execution: The integration of PC Financial and execution of strategic initiatives, including expanding EQ Bank's product shelf and leveraging digital platforms, are critical but carry execution risks.
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Guidance & Outlook
Housing Market Outlook: The company is cautiously optimistic about a rebound in the housing market in 2026, driven by structural demand for homeownership and supply issues. Revenue growth is expected when the market recovers, as over 60% of on-balance sheet loans are single-family residential. The rebound is contingent on lower rates, lower unemployment, and better GDP growth.
Commercial Loan Growth: Commercial loan growth is expected to follow broader economic confidence. The pipeline for commercial loans is currently twice as large as the same time last year, indicating a strong start to fiscal 2026.
Multiunit Residential Portfolio: The government’s increase in the CMB issuance limit to $80 billion, tied to multiunit housing, is expected to benefit the company’s multiunit residential portfolio.
Capital Position: The company has a 13.3% CET1 ratio, providing sufficient capital to fund anticipated growth in 2026.
Medium-Term Financial Objectives: The company reaffirms its medium-term financial objectives, excluding the impact of the PC Financial acquisition. ROE is expected to improve materially from 7.5% in Q4 2025 to approximately 12% in fiscal 2026, with further increases later in the year. Diluted EPS growth is projected within the 12%-15% range, and the efficiency ratio is expected to improve, with positive operating leverage.
Expense Management: The restructuring program is expected to result in $45 million in annual expense savings in fiscal 2026, with total expense growth projected in the low single digits. Positive operating leverage and a low 50s efficiency ratio are anticipated.
Net Interest Margin (NIM): Margins are expected to remain around the 2% plus level in 2026.
Credit Quality: Credit quality is expected to improve in the latter half of 2026, supported by the Bank of Canada’s rate reductions and Federal budget initiatives. Single-family residential delinquencies are trending positively, and equipment financing credit performance is improving due to portfolio repositioning.
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Shareholder Return Plan
Quarterly Dividend Increase: The quarterly dividend was increased to $0.57 per share, up from $0.55 last quarter and $0.49 last year. This reflects the company's strong track record of dividend increases.
Share Repurchase Program: The company repurchased a record 731,000 shares in the quarter as part of its strategy to return capital to shareholders. The company expects to continue buybacks next year.
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Key Q&A
Q:How long does the resolution process for impaired loans take?
A:It takes approximately 12 to 18 months to resolve impaired loans.
Q:Can we expect changes in the composition of the commercial portfolios?
A:The commercial bank will maintain its focus on CMHC-insured multi-unit lending and being a top alternative CRE lender. Growth in CMHC-insured lending and improvement in uninsured commercial real estate lending are expected.
Q:What is the outlook for residential mortgage portfolio impairments?
A:Gross impaired loans are expected to decline towards the end of the second half of the year, with early-stage delinquency moderating and formations coming down.
Q:What portion of the $12 million impaired PCLs in the residential mortgage portfolio is related to new impairments versus previously impaired loans?
A:More than half of the $12 million is related to previously impaired loans, with a mix of top-up provisions and new formations.
Q:Are the cost savings from restructuring benefiting the bottom line?
A:Yes, the $45 million in cost savings will benefit the bottom line, with expense growth reversal already visible and continuing into Q1.
Q:What is the target core Tier 1 position upon closing the PC Financial transaction?
A:The target is a strong CET1 capital position, with a focus on maintaining 15%-plus total capital.
Q:What is the outlook for the 41 basis points reserve coverage ratio?
A:The 41 basis points reserve coverage ratio could come down in a more positive credit environment.
Q:What is the loss ratio for the PC Financial portfolio, and how does it compare to normal levels?
A:The trailing 12-month loss ratio is about 4.2%, slightly below the normal level of 4.6%. It reflects the current credit environment.
Q:What is the nature of residential mortgage impairments?
A:Impairments are caused by a mix of job loss and over-indebtedness, with self-employed customers and certain industry segments like construction and transportation being more impacted.
Q:Will payment shocks on renewals in 2026 be higher or lower?
A:Payments on renewals in 2026 are expected to be meaningfully lower due to shorter loan durations and previous renewals into higher rates.
Q:What is the expected range for losses in 2026?
A:Management did not provide a specific range for losses in 2026.
Q:Does the PC Financial transaction impact ARB approval work?
A:No, the ARB strategy is fully committed and will continue independently of the PC Financial transaction.
Q:What is the long-term growth potential of the credit card portfolio compared to mortgages?
A:The credit card portfolio, backed by the PC Optimum program, has significant growth potential, driven by payment solutions and loyalty benefits, though it may be more GDP-driven compared to mortgages.
Q:Does the PC Financial transaction impact capital allocation policies?
A:No, the transaction does not impact capital allocation policies, including share buybacks and dividend payouts.
Q:How will loyalty costs from the PC Optimum program be offset?
A:Loyalty costs will be offset by greater deposit growth, higher interchange fees, and deeper customer relationships.
Q:What are the growth expectations for on-balance sheet loans in 2026?
A:On-balance sheet loan growth is expected to be in the medium single digits, with strong momentum in personal SFR and multifamily residential lending.
Q:What is the strategy for entering the wealth management space?
A:The focus is on building or acquiring a wealth platform to offer higher-yielding products integrated into the EQ Bank lineup, emphasizing distribution over manufacturing.
Q:What are the drivers for achieving a 12% ROE by the end of 2026?
A:Drivers include expense control, improvement in PCLs, net interest margin discipline, and capital allocation through buybacks.
Q:Why is EQB pulling back from insured single-family residential loans?
A:EQB is focusing on more profitable uninsured loans and balancing risk-adjusted returns, with strong broker relationships remaining intact.
Q:Review of Unclear Management Responses
A:Management avoided providing a specific range for losses in 2026 and did not give detailed parameters for the capital backing the PC Financial business or the exact ROE of the acquired business.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Bank Canada
Canadians
Challenger
EQ Bank
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PC Financial
PCLs
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