Morningstar DBRS Assigns BB Final Credit Rating to EQB Inc.'s Limited Recourse Capital Notes and Pfd-3 (low) Final Credit Rating to Non-Cumulative Preferred Shares, with Stable Trends

DBRS Limited (Morningstar DBRS) assigned a final credit rating of BB to EQB Inc.'s (EQB or the Group) Limited Recourse Capital Notes (Capital Notes) and a credit rating of Pfd-3 (low) to the non-cumulative Preferred Shares. Both trends are Stable.

Morningstar DBRS assigned the credit ratings using EQB Inc.'s (EQB) Long-Term Issuer Rating of BBB with a Stable trend as the starting point, and then applied our standard three notches for both capital instruments. Morningstar DBRS notes that since the Capital Notes would convert to non-NVCC preferred shares, the issuance is being viewed similar to a preferred share issuance.

On July 9, 2024, EQB issued $150 million of Capital Notes that mature on October 31, 2084, and will have an initial five-year fixed rate of 8%.

CREDIT RATING DRIVERS
The credit ratings of the securities will move in tandem with EQB's Long-Term Issuer Rating. Over the longer term, Morningstar DBRS would upgrade EQB's Long-Term Issuer Rating if EQB, together with Equitable Bank, continues to progress in diversifying funding sources, particularly through more stable direct-to-consumer channels, and revenue, through higher noninterest income, while maintaining sound asset quality.

Conversely, a downgrade of EQB's Long-Term Issuer Rating would result in a downgrade of the securities. Morningstar DBRS would downgrade the Group's Long-Term Issuer Rating if there are significant losses in the loan portfolio as a result of unforeseen weakness in underwriting and/or risk management, disproportionate growth in commercial originations that weaken the risk profile, or substantive funding pressure caused by deposit outflows.

Franchise Combined Building Block (BB) Assessment: Good/Moderate

Earnings Combined Building Block (BB) Assessment: Good/Moderate

Risk Combined Building Block (BB) Assessment: Strong/Good

Funding and Liquidity Combined Building Block (BB) Assessment: Moderate

Capitalization Combined Building Block (BB) Assessment: Good

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATION
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030

Notes:
All figures are in Canadian Dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (04 June 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at http://dbrs.morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

These are solicited credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit http://dbrs.morningstar.com.

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