Equitable Bank is planning to enter the covered bond market after having yesterday (Wednesday) announced it has mandated banks to develop a programme, taking the Canadian market into the next tier of mortgage lenders and indicating that issuance is a viable option for them.

Equitable Group announced that it had chosen Barclays and TD Securities to assist in developing a covered bond funding programme for Equitable Bank, with a view to entering the market as early as next year.

“As ‘Canada’s Challenger Bank’, we believe the development of a covered bond programme by a mid-sized bank is a natural fit with our ethos of bringing innovation to the marketplace,” said Andrew Moor, president and CEO of Equitable Bank. “For our bank, covered bonds have the potential to reduce our funding costs and be a meaningful source of additional funding diversification.

“Our choice to work with Barclays and TD demonstrates our commitment to the success of this initiative. Together, these institutions have exceptional global covered bond structuring and distribution capabilities. With their support, we are confident of designing an effective programme.”

The bank is the ninth largest Schedule 1 (Canadian-controlled) bank in the country.

According to research from DBRS in June, Equitable ranked joint 11th among Canadian financial institutions in terms of covered bond issuance capacity, behind the biggest eight who issue covered bonds and then Laurentian Bank and Canadian Western Bank, and with a similar capacity to Manulife Bank of Canada. DBRS put Equitable’s issuance capacity at around C$1bn as of January 2019 based on the way Canada’s covered bond limit ran until 1 August (with issuance limited to 4% of total assets), and an estimated C$1.1bn-C$1.4bn based on a new calculation introduced by the Office of the Superintendent of Financial Institutions (OSFI).

Market participants had previously speculated that one of the next group of Canadian institutions by size could take up covered bonds, but questioned whether their smaller scale would make issuance unviable. Prior to HSBC Bank Canada with issuance capacity of some C$4.5bn entering the market in November 2018, all issuers had capacity of C$10bn or more, while the estimated capacity of the next-largest after HSBC Canada, Laurentian, was just C$1.8bn-C$2.4bn, based on DBRS’s range of calculations.

DBRS changed the trend on its BBB long term issuer rating of Equitable Bank from stable to positive on 16 July, citing the bank’s “solid and growing franchise”, with the company being Canada’s largest mortgage lender in the Alt-A market niche.

“Equitable has also successfully launched new lending products that complement its mortgage offering in addition to expanding into adjacent verticals through acquisition,” said the rating agency. “Furthermore, the company continues to attract direct deposits through its digital bank, EQ Bank, while enhancing its wholesale funding channels.

“While the ratings reflect Equitable’s good asset quality and history of low impairments and charge-offs, the ratings also consider an eventual shift in the current credit cycle and the potential for a housing downturn in Canada.”

Mortgages under management increased 21% year-on-year to C$28.9bn in Q1 2019, according to DBRS, with prime insured mortgages constituting 20% of its portfolio.

DBRS noted that Equitable “is looking at enhancing and further diversifying its wholesale funding sources to complement its future growth”.

Photo: EQ Bank, Toronto; Credit: Can Pac Swire/Flickr