If National Bank of Canada’s (NA-T) deal to acquire Canadian Western Bank (CWB-T) gets the all-clear from regulators and shareholders, the declining number of small lenders in this country will shrink even more. That may be good news for EQB Inc. (EQB-T).
The financial firm, which operates Equitable Bank and the online EQ Bank, stands out as a survivor after a recent round of consolidation thinned the ranks of lenders beyond the Big Six banks.
Royal Bank of Canada (RY-T) completed its acquisition of HSBC Bank Canada in March. Smith Financial Corp. bought Home Capital Group Inc., an alternative mortgage lender that operates Home Trust, in August, 2023.
Laurentian Bank of Canada (LB-T) was also part of this trend – if only briefly – when it put itself up for sale last year, then withdrew the offer after it attracted no buyers.
That leaves EQB, which is focused on providing mortgages to homebuyers who don’t usually qualify for loans at larger banks, in an unusual position: among publicly traded Canadian financial firms, it now stands alone as an attractive entity for investors.
Already, investors are taking notice of how the banking sector could respond to the deal between National Bank and Canadian Western.
Sure, the Edmonton-based commercial lender’s 68-per-cent gain grabbed the spotlight Wednesday. That suggests considerable confidence among investors that the deal will close by the end of 2025, which is the time frame given by the two banks.
But other small bank stocks also rallied Wednesday in a kind of copycat reaction to the deal. Laurentian gained 6.6 per cent, suggesting investors once again believe the lender could find a suitable partner.
What’s more interesting, EQB gained 2.9 per cent amid heavier-than-normal trading volume. Though the share price retreated Thursday, the initial gain may indicate that investors believe the lender could emerge as a potential target if there is further consolidation.
There’s no evidence that one or more of the Big Six banks have EQB in their sights. I reached out to two significant EQB stakeholders, Beutel Goodman and Mawer Investment Management, but neither offered a comment on what impact the Canadian Western deal might have on the lender.
There’s another wrinkle here: Smith Financial, whose extensive financial portfolio includes Home Trust, Peloton Capital Management, Glass Lewis and Co., Fairstone Bank of Canada, Canada Guaranty and First National Financial LP, is EQB’s largest shareholder by far, with a 17.2-per-cent stake in the lender.
This gives Smith Financial – which didn’t immediately respond to a request for comment – a lot of say in how EQB responds to consolidation.
For its part, EQB remains staunchly independent.
“The challenge with today’s banking sector is that its densely concentrated nature with the large incumbents often manifests in less choice and more expensive banking, despite there being over 30 Schedule 1 banks in this country,” said Chadwick Westlake, EQB’s chief financial officer, in an e-mail.
But really, there isn’t much that players in the notoriously tight-lipped and highly regulated Canadian financial market can reveal about how the deal between National Bank and Canadian Western will play out over the coming months.
Investors may want to give EQB a closer look anyway.
Like other lenders, it has set aside more money to cover bad loans as high interest rates weigh on borrowers. These provisions for credit losses increased 43 per cent in the bank’s fiscal second quarter, compared with the first quarter.
Nonetheless, EQB’s adjusted earnings per share increased 2 per cent, and the bank recently raised its quarterly dividend by 7 per cent, for a 23-per-cent increase year-over-year.
Yet the stock is a bargain next to larger lenders. It has lower price-to-book and price-to-earnings ratios than the Big Six average, according to S&P Global Market Intelligence.
EQB’s one flaw as a takeover candidate is that its share price doesn’t follow the pattern of either Laurentian Bank or Canadian Western: It is not beaten up.
Over the past five years, it has risen 143 per cent. The share price of Canadian Western, on the other hand, was down 15 per cent over the five years prior to the National Bank deal announcement this week. And Laurentian’s is down 44 per cent over the same period.
There’s an upside to being a thriving bank, though: Even if it’s not a takeover candidate, EQB looks like an attractive investment.