Fitch revises Equitable Bank’s outlook to positive, affirms rating

Investing.com -- Fitch Ratings has revised its outlook for Equitable Bank (EQB) to positive from stable, while affirming the bank’s Long-Term Issuer Default Ratings (IDRs) at ’BBB-’. The ratings agency also maintained EQB’s Viability Rating at ’bbb-’ and Short-Term IDR at ’F3’.

The positive outlook is a reflection of EQB’s successful diversification of its business and funding profiles, and its improved risk profile over the past few years. Fitch believes that these changes could potentially lead to an upgrade of EQB’s Viability Rating. The outlook also suggests that EQB’s business and financial profiles are likely to be more resilient to economic stress.

Fitch has upgraded its assessment of EQB’s business profile to ’bbb-’ from ’bb+’, recognizing the bank’s expansion of its business lines and reach over the past few years. This expansion has allowed EQB to fill market gaps and offer products where larger Canadian banks are less competitive. As a result of recent bank mergers, EQB is now the seventh largest bank in Canada.

EQB’s core business is the alternative uninsured single-family residential mortgage market, which makes up a third of its loans under management. However, the acquisition of Concentra Bank in 2022, the introduction of new products such as reverse mortgages, and its entry into the Quebec province have allowed EQB to diversify its franchise and create more predictable revenue streams.

Fitch has also upgraded its assessment of EQB’s risk profile to ’bbb-’ from ’bb+’, reflecting improvements in the bank’s risk management function. This follows the appointment of a new chief risk officer in 2023, which led to a significant enhancement and formalization of many of EQB’s risk management frameworks, policies, and processes.

Despite a softening economic environment that has seen impairments rise over the past few quarters, EQB’s gross impairment ratio remains low. This is due to the bank’s strict loan workout processes and favorable loan-to-value ratios. However, Fitch expects EQB’s impairment ratio to fluctuate slightly as the bank expands into commercial lending, particularly insured multifamily residential and equipment finance.

With an operating income-to-risk-weighted assets ratio averaging 2.7% over the past four years, EQB’s earnings profile is solid for its rating category. This is a reflection of the bank’s good earnings growth, strong loan originations, and a long history of low loan losses. EQB’s branchless business model has also helped it maintain a favorable efficiency ratio compared to larger Canadian banks.

EQB’s capital ratios are favorable compared to other mid-tier banks and larger Canadian banks, with a Common Equity Tier 1 (CET1) ratio of 14.1% as of Q1 2025. This is appropriate given EQB’s nontraditional business model and higher risk profile.

Fitch also recognized EQB’s successful diversification of its funding sources and its increasing use of programs such as covered bonds and deposit notes, which help reduce its overall cost of funds. The ratings agency upgraded its assessment of EQB’s funding and liquidity assessment to ’bbb-’ from ’bb+’.

Factors that could lead to a downgrade of EQB’s rating include an inability to maintain the CET1 ratio at or above 13%, outsized loan growth that exceeds industry averages, operational and data breaches that call into question its cybersecurity infrastructure, and negative macro trends such as rising unemployment that result in increasing delinquencies and arrears.

On the other hand, factors that could lead to a rating upgrade include the absence of any spillover effects from proposed tariffs into the housing market, continued improvement of EQB’s profitability and business profiles, and EQB’s ability to grow its direct-to-consumer deposits through its EQ Bank channel so they represent 25% of total funding.

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