Major deal and leadership shifts herald a new era
Westlake said he knew when he stepped into the role that he had to make this deal happen to raise the profile of a bank that 80% to 90% of Canadians don’t know about. “This was a top priority because I truly believe this is the key to creating a major challenger for Canada. There is no deal like this,” he said in an interview.
The deal, which is expected to close this year, is the most significant but certainly not the only change taking place at the bank as it aims to create real competition for the Big Six that dominate the Canadian market.
There’s the change in leadership, with Westlake stepping into the role after previous CEO Andrew Moor died suddenly after 18 years at the helm. The bank has made other key hires, such as Anilisa Sainani, who stepped into the role of CFO last August, while the bank itself has also moved to a brand new headquarters.
Digital banking meets visibility in the real world
But it’s the PC Financial deal that Canadians will notice most, as EQ Bank’s yellow branding hits stores, solving a key challenge for a digital finance company trying to compete with established players.
“One of the things this does is it gives us more confidence, and confidence is critical in banking,” Westlake said. He said digital-only banks are reaching a plateau at some level, especially when Canadians are quite complacent in their banking preferences. “It has held us back in some ways. I think it has to be more real,” he said. “People still love people.”
But that doesn’t mean EQ Bank branches will pop up on street corners, as EQ keeps a close focus on costs and efficiency. Instead, growth could come from a possible expansion of its 180 pavilions in supermarkets. “You get all the functionality without needing the safe and the money, which keeps it simple.”
EQ Bank reduces costs and manages credit risk
Westlake has worked hard to keep the bank in order elsewhere, implementing a round of layoffs last fall that cut about 8% of its staff after costs at the bank rose. “We have made some big and difficult decisions, but it is important that we can operate very efficiently.”
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In addition to increasing efficiency, EQB Inc., as its parent company is known, has also been working to limit credit losses that have increased along with economic uncertainty. The bank is relatively more exposed to the mortgage market than the Big Six, and is also heavily focused on alternative mortgages, serving customers such as the self-employed who may struggle to obtain a conventional loan.
Over the past quarter, EQB saw its share of loans of concern rise, pushing up loan loss provisions. The bank saw “material credit deterioration that was evident across its loan portfolio,” Scotiabank analyst Mike Rizvanovic said in a note after EQB’s Q4 results. The deal with PC Financial will make the bank even more sensitive to future credit cycles, Rizvanovic noted, adding that he is concerned about how PC Financial’s portfolio of cards tends to suffer much higher loss ratios than the cards from the larger banks.
Westlake pushed back on PC Financial cards with higher loss ratios, saying it was about mid-pack among the big banks, while also saying alternative mortgage customers can also be more resilient in times of recession.
Rizvanovic said the deal provides useful revenue diversification, could be “transformative” for the bank’s deposit franchise and that he sees strong opportunities for growth in the credit card sector, but overall he said it was not such a clear win.
Other analysts were more optimistic, including BMO’s Étienne Ricard, who raised his price target for EQB from $108 to $130. He said the deal was a strategic improvement, diversified the bank and offered cross-selling potential.
EQ Bank looks to asset management to fill product gaps
One thing the PC deal doesn’t do, however, is provide asset management capabilities such as stock trading or investment advisory services. Besides credit cards, this is the other big gap for EQ Bank and Westlake said they are actively looking to address it, likely through another acquisition or partnership. “This is similar to the PC deal, where my view is that you can’t build it.”
If everything comes together, EQ Bank could have the product range needed to compete, but other online banks are also rapidly growing from strength to strength. Wealthsimple Inc. launched its first credit card last year and Questrade Financial Group received a banking license last October with plans to expand.
Westlake said all the alternatives combined are still such a small share compared to the Big Six that there is room for all of them to grow.
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