EQ Bank aims to become a household name

Canada’s seventh-largest bank is a lender the vast majority of Canadians have never heard of. It has no branches, credit cards, or wealth management offerings.

That could all soon change, says Chadwick Westlake, who became chief executive of EQ Bank last August and already announced a transformational, potentially career-defining deal to buy PC Financial in December. “We will become a household name by the end of this year,” he said. Buying the PC Mastercard portfolio and PC Money accounts, while bringing on Loblaw Cos. Ltd. and its PC Optimum loyalty program into a partnership, will put the EQ Bank brand into thousands of grocery stores and ATMs across the country.

Major deal and leadership shifts signal 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. “This was a top priority, because I truly believe this is the key to creating a scaled significant challenger for Canada. There’s no deal like this,” he said in an interview.

The deal, expected to close this year, is the most significant but hardly the only change going on at the bank as it aims to create real competition to the Big Six that dominate Canada’s 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 significant new hires, like Anilisa Sainani, who stepped into the CFO role last August, while the bank itself has also moved into a brand new head office. 

Digital banking meets real-world visibility

But it’s the PC Financial deal that Canadians will most notice, as EQ Bank’s yellow branding springs up in stores, and solves a key challenge for a digital financial firm trying to compete with established players.

“One of the things this does is it gives us more trust, and trust is paramount in banking,” said Westlake. He said digital-only banks plateau at a certain level, especially when Canadians are fairly complacent in their banking preferences. “It has held us back in some ways. I think it needs to be more real,” he said. “People still like people.”

But that doesn’t mean there will be EQ Bank branches popping up on street corners, as EQ keeps a close focus on costs and efficiencies. Growth could instead come from possibly expanding the 180 pavilions in grocery stores. “You get all the functionality without needing to have the vault and the cash, keeping it simple.”

EQ Bank trims costs and manages credit risk

Westlake has been working to keep the bank trim elsewhere as well, pushing through a round of layoffs last fall that saw about 8% of staff cut after expenses at the bank had crept up. “We did make some big and difficult decisions, but it’s important for us to operate very efficiently.”

Besides boosting efficiencies, EQB Inc., as the parent company is known, has also been working to limit loan losses that have spiked along with economic uncertainty. The bank is relatively much more exposed to the mortgage market than the Big Six, and it’s also pushed heavily into alternative mortgages, serving clients like the self-employed who may struggle to get a conventional loan.

In the last quarter, EQB saw its share of concerning loans rise, pushing up its provisions for credit losses. The bank saw a “material credit deterioration that was evident across its loan portfolio,” said Scotiabank analyst Mike Rizvanovic in a note after EQB’s Q4 results. The PC Financial deal will make the bank even more sensitive to future credit cycles, noted Rizvanovic, adding that he’s concerned about how PC Financial’s card portfolio tends to run at much higher loss ratios than the larger banks’ cards. 

Westlake pushed back on PC Financial cards having higher loss ratios, saying it was about mid-pack with the big banks, while also saying that alternative mortgage clients can also be more resilient in downturns. 

Rizvanovic said the deal does provide helpful revenue diversification, could be “transformative” for the bank’s deposit franchise and that he sees strong upside for growth in the credit card business, but overall he said it wasn’t such a clear win.  

Other analysts have been more bullish, including BMO’s Étienne Ricard who raised his price target for EQB to $130 from $108, saying the deal was strategically enhancing, diversifies the bank, and provides cross-selling potential.

EQ Bank eyes wealth management to fill product gaps

One thing the PC deal doesn’t do, though, is bring in wealth management capabilities like stock trading or investment advisory services. Along with credit cards, it’s been the other big gap for EQ Bank and one Westlake said they’re actively looking to fill, likely through another acquisition or partnership. “This is similar to the PC deal, where my view is you can’t build it.”

If it all comes together, EQ Bank could have the range of products needed to compete, but other online-based banks are also quickly muscling up. Wealthsimple Inc. launched its first credit card last year, and Questrade Financial Group secured a banking licence last October with plans to expand. 

Westlake said that all the alternatives combined still make up such a small share compared with the Big Six that there’s room for all of them to grow. 

As the federal government pushes ahead on open banking and other ways to boost competition, Westlake said it seems there’s a real shift going on at EQ, and in general in what he called the world’s most concentrated banking market. “We are truly at the cusp of driving a significant change in how banking is done in this country.”

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