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Alternative lender Equitable says all 6 big banks have agreed to fund $2B backstop

  • May 03, 2017

Alternative lender Equitable Group Inc. says all six of Canada’s big banks have agreed to participate in a funding backstop of up to $2 billion, should the need arise.

Equitable, Canada’s ninth-largest bank by assets, announced the creation of the funding facility on Monday when it revealed its first quarter earnings. While the bank revealed record profits of $43 million in the first three months of 2017, it also revealed that its deposit base had slightly eroded, down two per cent.

That stoked fears that Equitable was having similar problems to its rival Home Capital, which is seeing a flood of withdrawals ever since the OSC began an investigation into the company’s mortgage documentation practices.

Home Capital saw a flood of withdrawals from its savings accounts following the OSC news, which prompted the lender to get a $2 billion loan from a pension plan at an interest rate of between 16 and 22 per cent — high enough it’s raising questions about the company’s ability to stay in business.

Unlike bigger banks which raise money in a variety of ways, alternative lenders like Home Capital and Equitable primarily raise funds via savings accounts and GICs. They then take those funds and loan them out, making money in the process from the couple of percentage point gap between what they pay out in interest to savers, and what they charge borrowers.

Equitable’s funding facility is at a much lower term, including a 0.75 per cent fee to tap into it, a 0.50 per cent charge on any unused portion, and 1.25 per cent above the bank’s funding costs on any portion it uses.

“This interest rate is approximately 60 basis points over our GIC costs,” Equitable said in its earnings release on Monday.

Investors responded positively to the news, as the company’s shares jumped $10 on Monday to $46 a share after being dragged down amid contagion concerns for all alternative lenders. Last month, Equitable was trading as high as $75 a share. 

Equitable announced the credit facility on Monday before revealing on Wednesday that all six major banks have agreed to participate in it.

“We believe the mere presence of this facility sends a strong signal to the marketplace that Equitable has more than enough downside protection in place should last week’s industry developments continue to make news in future periods,” CFO Tim Wilson said. “As such, this is a prudent, proactive move on our part as the facility complements our proven, traditional sources of liquidity and funding.”

The bank’s executive team has been on a media blitz in recent days to dispel the notion that they have any underlying problems in their lending practices.

“We’ve been through those books so deeply, we know every corner,” CEO Andrew Moor told the CBC’s On The Money show on Monday. “There are no problems in our mortgages, I can tell you that for sure.”

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