In a tough year for Canadian banks, shares in mid-sized lender EQB Inc jumped more than 50% on solid earnings growth, making it the best-performing banking stock in 2023, with investors expecting more gains this year.

The Toronto-based digital bank has no physical branches, which has helped keep costs under check while many of the bigger institutions had to cut jobs as they grappled with an inflated cost base.

EQ Bank, Canada's seventh-largest bank, grew its adjusted net income last fiscal year by 11.2% while the big banks recorded between 0.7% growth and a 23% fall in earnings.

EQ's non-interest expenses rose 15.5% while at the top three banks they rose over 20%. CIBC

Now shareholders are betting that EQ's attractive mortgage products and its C$495 million acquisition of Concentra Bank in 2022 will drive earnings.

"It's going to be more and more on the radar of investors because they are gaining market share, they are doing more marketing promoting that challenger bank mentality. ... I think it's going to attract more investment," said Maxime Robillard, an analyst at Montreal-based Van Berkom Global Asset Management, which is an EQ shareholder.

Among the big six lenders, CIBC and National Bank shares rose 16% and 11% respectively in 2023, making them the biggest gainers.

Despite the 53.7% rally in EQ, the stock trades at a price-to-earning ratio of 8.07, compared with RBC's 12.78 and TD's 15.29, giving investors hope that the rally has legs.

 

To be sure, EQ is a minnow in Canada's concentrated banking market, where the top six lenders control over 90% of the assets and its C$3.3 billion market value is less than the C$4.1 billion profit industry leader Royal Bank Canada earned in its latest quarter.

Apart from trimming costs, the bigger banks set aside money to deal with potential bad debts due to a slowing economy. EQ's provisions grew slower than the industry and it invested in advertising campaigns and technology, a move CEO Andrew Moor said will boost customers by about 30%-40% from the current level of over 550,000.

"People love a great digital experience ... so we're on the right side of the general trend," Moor said in an interview. "But we're in a category where banking is not something that people change very easily. We've got more work to do to really convince people."

He noted that 80% of Canadians bank in the same institution where their parents did and a part of EQ's strategy is to attract the younger generation through attractive interest offerings, such as a 3% rate for depositing payroll, and the ease of everyday banking.

The focus for 2024 will also include tapping small businesses, an area Moor said is under served.

"We're going to come up with a challenger bank approach to really providing great services to small businesses," Moor said.

EQ's net income in fiscal 2024 is forecast to rise by 30%, according to LSEG data. That compares with an earnings forecast ranging between a 4.9% fall and 1.8% rise for the big banks.

"There is a lot that they (EQ) can do with their digital banking customers. ... We occasionally get excited about that," said EQ shareholder Kingwest & Co Managing Director Anthony Visano said.

(Reporting by Nivedita Balu in Toronto; Editing by Mark Porter)