Equitable Group Inc. reported financial results for the three months ended March 31, 2018 that reflected continued profitable growth of its wholly owned subsidiary, Equitable Bank, and on the basis of that performance increased its common share dividend.
FIRST QUARTER HIGHLIGHTS
- Net income was $40.2 million, down 7% from $43.4 million in the first quarter of 2017
- Diluted earnings per share (“EPS”) were $2.34, down 8% from $2.54 in the comparative quarter of last year
- Return on Shareholders’ Equity (“ROE”) was 14.5% compared to 18.4% in the Q1 2017
- Mortgages Under Management (“MUM”) were a record $23.8 billion, up 9% from $21.7 billion at March 31, 2017 and 2% up from December 31, 2017
- Book value per common share was $67.14, up 16% from $57.73 at March 31, 2017
Of note, Equitable took various actions in the second quarter of 2017 to successfully manage through funding market disruptions. The cost of these actions reduced first quarter 2018 earnings by $0.27 per share and ROE by 1.6 percentage points. These actions are discussed in the Company’s 2017 annual Management’s Discussion and Analysis.
DIVIDEND INCREASE AND DECLARATIONS
The Board of Directors today declared a quarterly common share dividend of $0.27 per common share, payable July 5, 2018, to common shareholders of record at the close of business on June 15, 2018. This represents a 17% increase over dividends declared in May 2017 and a 4% increase over the dividend declared in February 2018. This increase reflects the Board of Director’s belief that the Bank’s capital position is more than sufficient to support future asset growth. The Board also declared a quarterly dividend of $0.396875 per preferred share, payable June 30, 2018, to preferred shareholders of record at the close of business on June 15, 2018.
“Equitable produced solid first quarter results by leveraging its diversified business model and status as Canada’sChallenger Bank™ to successfully adapt to changing market conditions,” said Andrew Moor, President and Chief Executive Officer. “Mortgage assets, the source of most of our earnings, continued to grow despite challenging market conditions in the Single Family Lending business. As a planned offset, management deployed more capital into the Commercial Lending business and grew that portfolio by 6% in the quarter. As well, single family renewal rates increased in response to B-20 and the Bank’s attentive customer service, which helped to support single family portfolio growth in the quarter. Deposits grew to record levels as the EQ Bank digital platform surpassed 50,000 customers. Asset growth, in concert with continued low loan losses and tight expense control would have produced record first quarter EPS had it not been for the cost of our 2017 liquidity actions. The Bank’s continued strong performance and capital position supported our fourth common share dividend increase in the past year, and enabled us to finish the quarter as we started: with a capital position that exceeded all regulatory and internal requirements by a reasonable margin.”
- Single Family Lending mortgage principal was $9.5 billion at March 31, 2018, up 16% from $8.2 billion a year ago, aided by higher renewal rates.
- Commercial Lending mortgage principal was $3.1 billion at March 31, 2018, up $122 million or 4% from Q1 2017, supported by record quarterly origination levels in Q1 2018.
- Securitization Financing MUM increased 6% to $11.2 billion at March 31, 2018 from $10.5 billion a year ago on higher multi-family volumes.
- Deposit principal outstanding amounted to $11.9 billion at March 31, 2018, up 19% from $9.9 billion relative to Q1 of last year.
Equitable’s credit metrics reflect the high quality of the mortgage portfolio. Net impaired mortgage assets at March 31, 2018 were 0.13% of total mortgage assets compared to 0.21% at March 31, 2017. The allowance for credit losses represented 0.13% of total mortgage assets at March 31, 2018, in excess of the Bank’s average annual loss rate of 0.04% over the past decade. This allowance represents the amount that the Bank has reserved on its balance sheet to absorb credit losses. As a result of the adoption of IFRS 9 on January 1, 2018, the allowance for credit losses decreased $8.5 million due to a transitional adjustment.
The Provision for Credit Losses (“PCL”) was $0.8 million or 0.02% of mortgage principal in Q1 2018, which is $0.4 millionor one basis point higher than last quarter but stable compared to Q1 2017. IFRS 9 is based on an expected loss concept compared to an incurred loss approach under the previous IAS 39 and as such, IFRS 9 incorporates forward-looking economic forecasts. Management’s analysis, based on extensive back testing, suggests that IFRS 9 will not have a material impact on the average PCL over a long-term horizon but may result in greater quarterly volatility.
Equitable Bank’s Capital Ratios continue to exceed minimum regulatory standards and remain above the levels of most other publicly listed banks. At March 31, 2018, the Bank’s:
- Common Equity Tier 1 Capital Ratio was 14.7%, surpassing the Basel III minimum of 7.0%, and up from last year’s level of 13.9%
- Total Capital Ratio was 16.0%, above the regulatory requirement of 10.5%
- Leverage Ratio was 5.5% and as such the Bank was fully compliant with the target that OSFI sets on a confidential, institution-by-institution basis
Equitable continues to push forward with key strategic initiatives that are designed to further its status as Canada’sChallenger Bank™ and improve the value of its franchise for shareholders:
- EQ Bank introduced GICs to its platform, enabling Canadians to access an important savings vehicle straight from any mobile device, further diversifying EQ Bank’s deposits, and lengthening the term of those deposits. EQ BankGICs offer a competitive rate of interest for various terms of up to 5 years.
- EQ Bank finished the first quarter with $1.7 billion of deposits, 42% or $515 million higher than a year ago, primarily reflecting the growing popularity of the EQ Bank Savings Plus Account and more generally, the convenience, control, and performance provided by an all-digital demand account. This growth complemented a 23% or $1.7 billion year-over-year increase in brokered term deposits (GICs) placed by deposit agents, investment dealers and financial planners on behalf of Canadian savers.
- Equitable introduced its PATH Home Plan™ offering through mortgage brokers in major urban centres in Ontario, British Columbia and Alberta. The PATH Home Plan™ reverse mortgage solution provides Canadians over the age of 55 with a cost-effective way to unlock equity in their homes – without downsizing or incurring monthly charges – to fund their preferred retirement lifestyles. While this product will not make a material contribution to asset growth or earnings in 2018, management is pleased with early market receptivity and believes PATH has the potential to create meaningful long-term value.
- Equitable successfully introduced digital functionality within its Single Family business that provides residential customers with the option of 24/7 self-service, a development that is consistent with the Bank’s objective of providing simple, convenient service in its chosen markets.
- Equitable’s productive workforce and branchless business model produced an Efficiency Ratio of 37.7% in the first quarter even as the Bank continued to invest in future growth and improve operational effectiveness.
Equitable expects that its strategy, including its disciplined approach to capital allocation, will continue to deliver value to shareholders and protect the money that depositors have trusted to the Bank. Asset quality remains high and the Bank’s diversified business model continues to present meaningful opportunities. Management expects earnings to continue growing in 2018 but that ROE will be below the Bank’s 5-year average of 17.2% due to the costs associated with successfully navigating through funding market disruptions that affected a subset of financial institutions in 2017. The assumptions used in formulating these expectations can be found in our Management’s Discussion and Analysis available on the Company’s website and on SEDAR.
“Canada’s housing market is adjusting to more restrictive B-20 underwriting guidelines implemented on January 1st by Canada’s federally regulated financial institutions,” said Mr. Moor. “We believe this period of adjustment will last several quarters as home buyers change their behaviours and lenders update their competitive strategies. We continue to expect our alternative single-family portfolio to grow modestly in 2018 despite dampened demand for new single-family mortgages due to improved mortgage renewal rates and the fact that even at reduced levels, originations should still be higher than our attrition.”
To offset slower portfolio growth in Single Family, Equitable intends to continue deploying more capital into other businesses, including Commercial Lending and reverse mortgages. The diversification of the Bank’s lending book continues to be both a strength and an objective for the future. Equitable has deep expertise and experience in secured lending and believes it can grow Commercial Lending and PATH reverse mortgage assets within its current risk-return appetite. Considering all factors, management believes that year-over-year growth in MUM and balance sheet assets could be in the range of 6% to 8% in 2018, although significant uncertainty remains in this outlook due to unsettled market dynamics.
“As we move forward and as part of our normal planning activities, we will evaluate whether the Bank is carrying the appropriate amount of common equity capital given evolving market opportunities,” said Mr. Moor. “While we are pursuing exciting new Challenger Bank growth avenues – each with opportunities to deploy capital at high ROEs – we will take actions to adjust our equity base if we have more capital than we can use effectively. We will determine the best course of action for shareholder value creation once the true impact of B-20 is clarified. In the meantime, as Canada’s Challenger Bank™, we remain squarely focused on making banking better for Canadians across all of our business lines.”
“In support of our growth initiatives, we plan to continue investing in the Bank’s franchise, adding more features and functionality to our EQ Bank platform, and reinforcing our high-level of customer service, all of which will cause non-interest expenses to increase at year-over-year rates slightly higher than the growth rate of the overall business,” said Tim Wilson, Senior Vice President and Chief Financial Officer. “That said, if actual growth in our lending markets is different than anticipated, we will manage our expense levels accordingly. All things considered, we expect our Efficiency Ratio will be in the high 30% range this year, a level that will define Equitable as one of Canada’s most efficient banks.”
PUBLIC ACCOUNTABILITY STATEMENT
Equitable also announced the release of its first Public Accountability Statement, highlighting the Bank’s commitments as an engaged and accountable community member dedicated to enriching the lives of Canadians. The report contains information on Equitable Bank’s initiatives to develop its workforce, make financial services more accessible across Canada, improve financial literacy, support the arts and minimize its environmental impact. All Canadian Banks with Shareholders’ Equity of more than $1 billion are required by the Bank Act to issue such reports annually.
“As Canada’s Challenger Bank, we identify with helping Canadians build resilience whether it be on an individual level, or within our shared communities,” said Mr. Moor. “Our first annual Accountability Statement provides a fantastic opportunity to report on what the Bank has accomplished hand-in-hand with our employees and community partners. I’m proud of what our small, but dedicated team has done and excited by all that we have planned to keep growing together in the years ahead.”
A copy of the Public Accountability Statement is available online at www.equitablebank.ca.
ABOUT EQUITABLE GROUP INC.
Equitable Group Inc. is a growing Canadian financial services business that operates through its wholly-owned subsidiary, Equitable Bank. Equitable Bank, Canada’s Challenger Bank™, is the country’s ninth largest independent Schedule I bank and offers a diverse suite of residential lending, commercial lending and savings solutions to Canadians. Through its proven branchless approach and customer service focus, Equitable Bank has grown to over $25 billion of Assets Under Management. EQ Bank, the digital banking arm of Equitable Bank, provides state-of-the-art digital banking services to more than 50,000 Canadians. Equitable Bank employs more than 600 dedicated professionals across the country, and is a 2018 recipient of Canada’s Best Employer Platinum Award, the highest bestowed by AON. For more information about Equitable Bank and its products, please visit equitablebank.ca.
SOURCE Equitable Group Inc.