Tax-Free Savings Account (TFSA) season is upon us. This year, Canadians are getting $6,500 in new TFSA contribution room. In March, the new TFSA room becomes available. This makes today a great time to look into new Canadian stocks to buy with $6,500.
In this article I will explore one Canadian stock that’s worth researching and possibly investing some of your $6,500 into. Of course, investors should always diversify — I’d never suggest putting all of your $6,500 into the stock I’m about to reveal. I do, however, think it merits inclusion in a diversified portfolio.
EQB
EQB (TSX:EQB) is a small Canadian bank that operates only online. Known as “Canada’s challenger bank,” it’s bringing competition to a banking industry that’s not known for a whole lot of it. Normally, competition isn’t a good thing, because it means that companies have less pricing power. However, EQB’s particular form of “competition” is based on innovation rather than going up against bigger banks head to head.
What EQB does is it offers savings accounts, loans, and Guaranteed Investment Certificates — much like other banks do. However, it doesn’t have physical branches, so it saves money and hopefully earns higher margins than other banks do.
Is this strategy working for EQB?
One way we could answer that question would be to look at the company’s most recent quarterly earnings release. In the quarter, the company delivered the following:
- $235 million in revenue, up 22%
- $218 million in net interest income (that means loan interest minus deposit interest), up 40%
- $2.46 in earnings per share, up 7%
- $30.3 billion in loans, up 43%
It was a pretty good quarter. You don’t often see performance like that from Canada’s Big Six banks. At least, the growth was great. The return on equity (a profit metric) was 15.7%, which is about typical for a Canadian bank. It looks like the lack of branches is not doing much for EQB in terms of margins, but it might be helping with growth.
Why now is a good idea to look into EQB stock
So far, I’ve outlined a case that EQB is a promising company. It’s profitable; it’s thriving; it’s growing; it’s small — what’s not to love? These are all valid reasons to research a stock like EQB, but they aren’t quite reason enough to just go straight out and buy it. A trend of growth and profitability can easily reverse. So, why look at EQB stock today?
One reason is that it’s cheap. Canadian banks are generally cheap compared to the universe of all stocks, but EQB’s 8.3 price-to-earnings ratio is even lower than that of the average Canadian bank. So, investors might be getting a good bargain here.
Second, today’s macroeconomic climate is favourable to banks. The Bank of Canada is currently raising interest rates, and high interest rates are good for banks. The higher the Bank of Canada’s policy rate, the higher the rates that commercial banks charge on their loans. This doesn’t always boost profits — sometimes, high interest rates cause recessions — but it can boost profits when the overall economy cooperates. So, banking — the sector that EQB is in — has a lot of potential in today’s economy.
