Should you sell your EQB stock?

TD Cowen analyst Mario Mendonca says EQB’s (EQB Stock Quote, Chart, News, Analysts, Financials TSX:EQB) second-quarter earnings beat was low quality, with elevated expense adjustments and continued credit deterioration offsetting a better-than-expected headline result.

As reported by the Globe and Mail, on May 28, Mendonca maintained his “Buy” rating on EQB, but lowered his target price to $123.00 from $132.00.  The street average target is $120.40.

After markets closed Wednesday, the company behind Equitable Bank reported revenue of $302.4-million for the quarter ended April 30, down from $316-million a year earlier but ahead of the Street’s $300.5-million estimate.

Adjusted EPS was $2.03, up 12% year-over-year and down 10% sequentially. The result topped consensus at $1.98, but was five cents below Mendonca’s forecast.

“The $0.05 Adj. EPS beat vs. consensus was low quality, in our view,” he said. “While the beat was driven by better operating leverage, expenses reflected a $33.6-million adjustment, including a $17.8-million provision to exit a merchant payments business which did not contribute materially to revenue or earnings. We believe investors will see the adjustments as a negative surprise, and that EQB might undergo additional charges to eventually exit the equipment loan business. Adj. Opex also benefited from a nonrecurring $5-million capital tax gain.”

Mendonca said credit remains the larger concern. Impaired provisions for credit losses were a 15-cent drag on adjusted EPS relative to his estimates, while the 35-basis-point impaired PCL ratio was above both TD Cowen and consensus estimates of 30 basis points.

“Negative: Credit continues to deteriorate,” he said. “Credit stress in the uninsured SFR book is not spreading beyond the GTA, but GILs continue to build on longer resolution timelines. SFR uninsured 90-day arrears ratios were up 20bps quarter-over-quarter.”

Mendonca said investors are likely to focus on impaired PCLs and the size of the company’s operating expense adjustments.

“We like EQB on strong buying activity (buybacks/Loblaw) & PC deal, but acknowledge that credit and loan growth are an issue,” he said.

Mendonca’s earnings growth expectations for fiscal 2026 remain muted because of soft loan growth and credit trends. He said the PC Financial acquisition has strategic merit and could create upside if management executes, but added that EQB’s current valuation discount to the large banks appears fair given the softer near-term outlook and improving setup into fiscal 2027.

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