This Canadian bank stock is undervalued, BMO says

BMO Capital Markets analyst Étienne Ricard upgraded EQB (EQB Stock Quote, Chart, News, Analysts, Financials TSX:EQB) to “Outperform” from “Market Perform” in a Jan. 20 report and raised his price target to $130 from $108, now the highest on the Street.

The average target is $104.71, according to LSEG data.

As reported by the Globe and Mail, Ricard said EQB’s $800-million acquisition of PC Financial from Loblaw is “strategically enhancing,” expanding customer reach while diversifying the bank’s asset mix, funding sources, and revenue streams. He added that improving visibility toward a return to 15% ROE improves the risk-reward profile, with upside potential to $150 (1.5x book value) and downside around $85 (book value).

The analyst highlighted four core benefits of the transaction. First, the deal significantly broadens distribution, adding 2.5 million PC Financial clients to EQB’s base of roughly 0.8 million, while also providing access to 17 million PC Optimum members as the only bank enabling customers to earn loyalty points.

Second, Ricard said the acquisition introduces credit cards as a new lending vertical, which could represent more than 30% of pro forma net interest income.

Third, the mix shift meaningfully increases non-interest revenue, which could exceed 30% of pro forma total revenues versus about 14% currently, driven by interchange, transaction, and card fees.

Fourth, the deal improves funding flexibility through additional wholesale channels, including Eagle Trust, and direct-to-consumer deposits via PC Money.

Ricard also pointed to $60-million of potential cross-selling synergies, representing roughly 7% upside to out-year earnings estimates, on top of expected cost synergies. He said EQB could cross-sell EQ Bank deposits to PC Financial customers, and assuming a 20% conversion rate, could add more than 500,000 new customers, generate $1.5-billion in incremental deposits, and reduce annual net interest expense by about $30-million. In addition, cross-selling credit cards to existing EQ Bank customers could add approximately $200-million in lending balances and contribute another $30-million of pre-tax income.

Ricard said the combination of expanded scale, higher-quality earnings, and improving returns supports valuation upside as EQB integrates PC Financial and executes on cross-selling opportunities.

-30-