Fitch Ratings reported that alternative lender Equitable Bank is uniquely positioned to take advantage of growing trends in electronic banking that have been accelerated by the pandemic.
Late last week, Fitch said the bank’s long-term and short-term (IDR) issuer default ratings were “BBB-” and “F3” respectively. The outlook for ratings is stable, although strongly influenced by the “bank’s funding and liquidity profile, and in particular deposits from brokers”.
“Fitch believes [Equitable’s] the ratings reflect its small but growing franchise in Canada, ”the agency said. “Fitch believes that EQB has done an effective job establishing itself in the niche of the alternative mortgage market for single family homes, being one of the two main competitors in Canada.
Equitable also prides itself on good loan growth as well as the absence of significant losses, leading to stable profits which have grown by an average of 10.1% per annum over the past five years. Equitable’s average annual ROE was 15.4% over the same period, Fitch estimated.
“This strong performance occurred even as income is primarily net interest income, resulting in less income diversity,” said Fitch. “The bank’s profit support is a branchless business model and low efficiency ratios. EQB’s efficiency ratio was 36% (for full year 2020) and compares favorably with an average of around 57% over the same period for many of its Canadian peers.
Read more: Equitable Group presents its 2021 outlook
However, Fitch noted that while one of Equitable’s greatest strengths is its uninsured alternative mortgage business, this is also a critical area of risk that merits further examination.
“The portfolio represents a significant portion, around 35%, of total loans on the balance sheet and is made up largely of clients such as immigrants who do not have a deep credit history,” Fitch said, adding that these consumers have less financial flexibility and are more sensitive to rising rates or economic shocks.
Nonetheless, Equitable’s asset quality is strong despite these potentially riskier clients, primarily because the bank is supported by prudent underwriting, a diligent collection process, and low residential / commercial loan-to-value ratios.
“Fitch also recognizes that EQB’s personal loans typically last only one to two years, while a mortgage at a major bank typically lasts for five years,” the agency said. “In addition, unlike its larger counterparts, EQB’s entire loan portfolio is secure, which helps minimize losses. Fitch notes that EQB’s actual credit losses are less than 5 basis points, which is lower than that of many other Canadian banks.