A Bull Market Is Coming and This Bank Is Out of Favour for No Reason
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A new bull market appears to be in the works. Stocks are up for the year, central banks are slowing down or pausing their rate hikes, and investors are getting bullish about artificial intelligence and other new innovative technologies. It’s an exciting time to be in the markets.
However, not all stocks are getting the benefit of this rally equally. It’s mostly tech stocks that have been rallying this year, banks and energy stocks are down. That’s a shame, because both of those sectors have great value opportunities in them, opportunities that may perform better than the stocks that are currently in favour.
In this article I will explore one overlooked bank stock that may fit that description.
EQB (TSX:EQB) is a Canadian online bank. It differentiates itself from other banks by its lack of branches. Its service mix is also a little different from the larger banks: it does no investment banking for example. Here are some of the services it offers:
- High-yield savings accounts
- Guaranteed Investment Certificates (GICs)
- Commercial loans
- Insurance lending
As you can see, it’s a pretty typical mix of services for a bank, although a couple items you’d get with a mainstream bank are lacking.
EQB is doing pretty well as a business. In its most recent quarter, it delivered the following:
- $99.5 million in net income, up 13%
- $264 million in revenue, up 40%
- $64.47 in book value per share, up 12%
As you can see, revenue, earnings and book value all increased considerably in the period. And yet, if you look at EQB’s stock chart, you’ll see that it’s actually down in price from the $69 high that it set back in February. As a result, the stock is fairly inexpensive, trading at only 8.6 times earnings, despite having very strong growth. Why is it so out of favour?
Why it’s out of favour
The most likely reason why EQB stock is out of favour is because the company got caught up in the U.S. regional banking crisis. I don’t mean to say that EQB, the company, was actually part of the crisis. It was not. However, its shares sold off in the same period when U.S. regional banks were selling off, so people probably thought it was similar to the U.S. banks that were failing at the time. EQB’s stock dropped 20% from the bottom to the top in the banking crisis, so it’s likely that the crisis is what caused people to sour on the stock.
Were they right in thinking that way?
Possibly. Compared to the large Canadian banks, EQB has relatively little cash backing up its deposits. If you add up its cash and “investments” on its balance sheet, you’ll see that it has $3.88 billion in highly liquid uncommitted assets against $31.5 billion in deposits. That’s only about 12% coverage, so EQB would likely struggle if it ever faced a bank run.
However, there are some subtleties here. For example, an extremely high percentage of EQB’s deposits (about 95%) are term deposits, and most are insured, so it isn’t at risk of having depositors yank all their money out right away. In fact, its liquidity coverage ratio (which measures liquidity needed to cover “expected” levels of withdrawals) is very high. That’s because there are practical barriers to EQB depositors actually taking their money out quickly. The relatively weak liquidity hasn’t sunk EQB so far, but it is a risk factor for investors to keep an eye on.