Morningstar DBRS Confirms Equitable Bank at BBB (high) and EQB Inc. at BBB With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on Equitable Bank (Equitable or the Bank), including the Bank's Long-Term Issuer Rating at BBB (high). Morningstar DBRS also confirmed the credit ratings on Equitable's holding company, EQB Inc. (EQB or the Group), including its Long-Term Issuer Rating at BBB. The trend on all credit ratings is Stable. The Bank's Intrinsic Assessment (IA) was maintained at BBB (high), while its Support Assessment (SA) is SA1, reflecting the internal support provided by the Group. The Group's SA remains at SA3 with its Long-Term Issuer Rating positioned one notch below the Bank's IA.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect Equitable's increased scale and growing franchise as the seventh-largest Schedule I bank in Canada by assets. As at Q2 2025, the Bank had $134 billion in assets under management and administration and is one of the largest uninsured residential mortgage providers in the self-employed and new immigrant space in Canada. The Bank generates consistent profitability, producing solid returns on equity and efficiency metrics, although in Morningstar DBRS' view, the negative impact of increased operating expenses and provisions for credit losses (PCL) on earnings is likely to continue in the near to medium term. Additionally, the Bank maintains solid capitalization and adequate liquidity levels. Further, while brokered deposits remain Equitable's primary source of funding, the Bank continues to grow its direct-to-consumer deposits while expanding its wholesale funding channels.

Although the acquisitions of Concentra Bank (Concentra) and ACM Advisors Ltd. (ACM) add some revenue diversification, the high proportion of spread income remains a credit ratings constraint. Moreover, Morningstar DBRS remains concerned about high Canadian household debt levels and the trade conflict between the U.S. and Canada, resulting in ongoing uncertainty to the Canadian economy. Morningstar DBRS considers the Bank to be more susceptible than large Canadian banks to significant adverse changes in the real estate market or the economy, particularly with respect to its uninsured residential mortgage portfolio. Nonetheless, Equitable has a strong track record of managing the risks associated with its mortgage portfolio.

The Bank's IA of BBB (high) has been assigned at the lower end of the IA Range, reflecting Equitable's lack of earnings diversification and the concentration in the uninsured residential mortgage space targeting self-employed and new immigrant borrowers.

CREDIT RATING DRIVERS
Continued progress in diversifying funding sources, particularly through stable direct-to-consumer channels, and revenue mix, through a higher proportion of noninterest income, while maintaining sound asset quality would result in a credit ratings upgrade.

Conversely, a significant deterioration in asset quality, disproportionate growth in commercial originations that weaken the risk profile, or substantive funding pressures would result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Good/Moderate
Equitable is a fully digital bank, providing customers with an alternative to the large banks, particularly through EQ Bank, its digital retail service. Equitable's uninsured residential mortgage portfolio has a primary focus on borrowers that are self-employed and/or new immigrants. The Bank also has a notable prime insured mortgage portfolio and has seen momentum in its insured multi-unit commercial lending portfolio. Since 2022, the Group has increased its scale and reach through acquisitions, such as Concentra and ACM, and added new products, such as Notice Deposit Account, EQ Bank Business account, and USD account. Additionally, EQ Bank's launch into Québec could have a positive impact on customer acquisition. Further, although currently a small proportion of the loan book, Equitable's wealth decumulation business, particularly reverse mortgages, has experienced strong growth since its launch in 2021.

Earnings Combined Building Block Assessment: Good/Moderate
Equitable generates consistent profitability. The 2022 Concentra acquisition has bolstered revenue and product diversification, while EQB's stake in ACM has been the main driver behind the significant increase in fees and commission income to $78 million in F2024 from $45 million in F2023, based on Morningstar DBRS' calculation. However, net interest income (NII) still represented the vast majority of adjusted revenue at 84% in H1 2025, which Morningstar DBRS views as a credit ratings constraint. Adjusted H1 2025 net income as reported by Equitable decreased 4% year over year (YOY) to $204.9 million, as higher revenue was offset by increased noninterest expenses and PCL. Adjusted H1 2025 NII as reported increased 2% YOY to $534.4 million on asset growth across the Bank's loan portfolios and a higher net interest margin (NIM), which expanded 8 basis points (bps) YOY to 2.2%. Overall, Equitable's H1 2025 adjusted return on equity of 13.6% and an efficiency ratio of 48.3% remain at the lower end of the peer range. However, Morningstar DBRS expects the Bank's earnings to be negatively affected by increased noninterest expenses and PCL in the near to medium term.

Risk Combined Building Block Assessment: Good/Moderate
Morningstar DBRS considers Equitable's risk profile to be good, reflecting its sound risk culture, with its loan book nearly 97% secured by assets and 57% insured. At Q2 2025, personal lending comprised approximately 45% of loans under management (LUMs). Commercial banking lending (more than 50% of LUM), including equipment leasing, is diversified with shopping centres and hotels representing a very manageable 3.0% and 0.1% of commercial loans (1.0% and 0.02% of total loans), respectively, as of Q2 2025. Similarly, offices with an average loan-to-value ratio of 67% represent approximately 0.4% of the Bank's LUM and total construction loans represent nearly 6.0% of LUM. Despite such relatively low exposures to these more volatile asset classes, credit metrics have deteriorated over the past year, driven largely by the commercial banking segment, particularly equipment financing. As at Q2 2025, the Bank reported net impaired loans as a percentage of total loans at 156 bps and PCL at 25 bps, and Morningstar DBRS expects further modest deterioration.

Funding and Liquidity Combined Building Block Assessment: Good/Moderate
Equitable continues to diversify its funding profile although it still relies on brokered deposits. Specifically, direct-to-consumer deposits through EQ Bank and credit union deposits represented nearly 35% of on-balance sheet funding in Q2 2025 compared with 16% in Q4 2018 and have somewhat reduced the Bank's reliance on brokered deposits, which decreased to 49% as of Q2 2025 from around 53% at YE 2022. Further, a portion of the brokered deposits (approximately $4 billion) come from self-directed nominee accounts and is largely made up of non-cashable term deposits, which Morningstar DBRS views as relatively more stable than agent deposits. Additionally, the Bank has further diversified its funding base by building out its covered bond program with covered bonds outstanding of $2.1 billion as at Q2 2025. Equitable holds sufficient levels of liquidity with $4.6 billion in liquid assets, representing 8.5% of total assets and approximately 58% of demand deposits, as at Q2 2025.

Capitalization Combined Building Block Assessment: Good
Equitable's capitalization is good with a CET1 ratio of 13.2% at Q2 2025, providing a sound cushion to withstand adverse scenarios. The Bank is able to grow its CET1 ratio through stable internal capital generation combined with a relatively low dividend payout in the 10% range. Equitable remains committed to maintaining a CET1 target ratio of 13%+ for 2025. Additionally, the Bank has made progress developing advanced internal rating-based models, which are expected to better capture the risk of its underlying portfolio and help it better assign capital, although in Morningstar DBRS' view, any capital relief is expected to take several years.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/459089.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factors 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 Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (May 23, 2025), https://dbrs.morningstar.com/research/454637. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196 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 dbrs.morningstar.com.

The credit rating was 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.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-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 trends and credit ratings are under regular surveillance.

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

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