Canada's Challenger Bank Just Got Better

This week, attached to a pretty crummy earnings report, EQ Bank (TSX:EQB) gave investors some very interesting news.

It had agreed to purchase the financial services arm of Loblaw Companies (TSX:L). The crown jewel of the transaction is the PC Financial Mastercard, which has grown to become one of Canada’s more popular lines of credit cards. The big appeal of the PC Mastercard is the ability to earn PC Points for every dollar spent, points that can then be redeemed at the various Loblaw grocery banners, Shopper Drug Mart, Esso gas stations, and a few other places.

PC Optimum is Canada’s most popular loyalty program. More than 17 million Canadians — or about half the adult-aged population of the country — are active members. It’s a behemoth.

The deal will also mark the beginning of a long-term partnership. EQ Bank will pay Loblaw about $800M for its financial services arm — which also includes some bank accounts, insurance customers, and even a few mortgages — which Loblaw has decided to take in the form of shares. There will also be a small cash component to the deal, which will be paid from EQ’s own balance sheet.

EQ paid the equivalent of 1.15x book value for these assets, which is a much cheaper valuation than other recent bank acquisitions. For instance, Royal Bank (TSX:RY) paid approximately 2.3x book value when it offered to acquire HSBC Canada in 2022.

Investors cheered the deal; EQ Bank shares shot up more than 10% immediately after the deal was announced, and has maintained those gains.

Meanwhile, I took to the site formerly known as Twitter, and made my thoughts clear. I really like this deal from EQ Bank’s perspective.

Let’s dive in deeper, and take a much closer look at what I like about this deal.

Multiple new growth avenues

EQ Bank shares have suffered so far in 2025. The stock was almost 20% lower at one point, but has recovered to just posting a small loss.

Still, this weakness came as most of Canada’s other bank stocks have hit multi-year and all-time highs. Including dividends, TD Bank (TSX:TD) is up nearly 60%, and the rest of peers are up between 25-40%. It’s been a very good year to be a Canadian bank investor… except if you owned EQB.

So, what gives?

Simply put, EQ’s results have sucked the big one. The company has struggled with:

• Weakness in Toronto’s real estate market

• An inability to really grow the mortgage business beyond Toronto/Southern Ontario

• Fewer loans made at higher interest rates, and more loans made at lower interest rates

• One-time costs associated with the company moving into its new headquarters

• The unfortunate and unexpected death of long-time CEO Andrew Moor

These factors — plus increased loan loss provisions — have driven the company’s return on equity lower. ROE is my preferred measure of profitability in a bank, I think it matters far more than price-to-book value, or price-to-earnings. Hell, it even matters more than the dividend yield shares are offering — and y’all know how much we like dividends around here.

After years of putting up ROEs that surpassed most of its peers, EQ Bank was only able to deliver an adjusted ROE of just over 11% in 2025. That was its lowest output in years, with results driven lower from the factors I outlined above.

Additionally, sentiment isn’t great here. The company told investors that it plans to return to a 15-17% ROE in the upcoming years, but it might take a little while to get there. The fact is that big chunks of EQ’s business is driven by two factors — Canadian immigration and Toronto housing. And both of those tailwinds aren’t really expected to be there in the short-term.

Now, here’s the deal. I don’t know when the Toronto real estate market will recover. Lower rates and an improving economy in 2026 could help the market march higher. Immigration could easily settle at a lower, more steady level, after spiking in the 2021-24 period. I still think the long-term growth story is still there, but I’m the first to admit the short-term might be a little uncertain.

By purchasing PC Financial, EQB has suddenly created a new growth path, one that is a nice add-on to its current offerings. Remember, EQ has more than 750,000 banking customers of its own, and up until now hasn’t really had a compelling credit card to offer them. And, perhaps more importantly, it’ll soon have some 2.5M new PC Financial bank and credit card customers. The potential to cross-sell these folks mortgages, GICs, and other banking products will be huge.

The value of the partnership

Unlike when Loblaw sold its banking assets to CIBC in 2018, this is a long-term partnership between Canada’s largest grocer and Canada’s Challenger Bank. It’s a partnership I’m excited about, and I think y’all should be, too.

As part of the deal, EQ Bank will take over PC Financial’s marketing efforts inside of Loblaw stores. That means it will have:

• Some 180 pavilions inside various Loblaw stores, almost like bank branches

• Marketing in just about every single Loblaw store

• Some 600+ EQ Bank-branded ATMs (with more to come, presumably)

• The ability to sell its products, in-store, directly to Loblaw customers

The new partnership will also be valuable to existing EQ Bank customers. As I mentioned above, EQ doesn’t really have much of a credit card offering. Being able to offer PC Points will certainly help it up its credit card game.

Existing EQ Bank account holders will also have reasons to cheer the deal. The two companies will be able to offer special PC Optimum deals for EQ’s existing bank account holders, including personalized offers. Suddenly an EQ Bank account doesn’t just save on fees and pay better interest than competing bank offerings. It also gets customers better deals on groceries.

Back to the banking side, it’s obvious what this new deal means for EQ’s mortgage business. PC Financial savers have some $800M in deposits in the bank, cash that can then be used in EQ’s mortgage business.

EQ can also use its banking expertise to market to all 17M PC Optimum members. It can send these folks offers for high-rate GICs, a newly revamped PC Financial credit card, or a special PC Insiders mortgage rate. The ability to market to an already warm audience can’t be discounted.

In short, everyone is a winner here. That’s exactly what you should want to see in a deal.

The deal structure

The other thing I like about this deal is the way it was structured.

Yes, on the surface, it’s EQ Bank purchasing PC Financial. Loblaw is selling its financial assets for the second time in less than a decade, and EQ is paying what I view to be a fair price for its new prize.

But this is more akin to a merger, with both sides bringing something to the table. Loblaw has the existing customers, the world-class loyalty program, and the ability to market in its stores. But EQ is no slouch here; it has things to offer too. It knows banking better than Loblaw does. It should be able to make the whole operation more efficient. It would also have more options to use PC Financial deposits, since it is primarily a mortgage lender. I would wager EQ can really grow PC Financial.

When Loblaw sold its financial services arm to CIBC it waited a little while and just started up a new financial services division. It won’t do that this time.

One thing I discovered when I researched Loblaw for the premium side of this newsletter back in 2023 was that Canada’s largest grocer didn’t really view its financial services side as a profit centre. What I saw was a company that was content to make a little bit of money on credit cards, and comparatively tiny amount of money on mortgages and insurance. All it really cared about was the finance division subsidizing its loyalty program. Most finance profits were poured back into loyalty, although some were kept on hand for future growth.

It was a smart strategy. PC Optimum is now cemented as Canada’s top loyalty program, and I doubt anyone else is going to get particularly close to knocking it off its pedestal, either.

From Loblaw’s perspective, the same thing is happening going forward. Remember, EQ is paying mostly stock for the transaction. Various parts of Loblaw will own about 17% of EQ when it’s all said and done. Its portion of those profits will accomplish pretty much the same thing — except the actual operations are EQ Bank’s problem now.

And since EQ only pays about 25% of its profits as dividends, most of Loblaw’s new investment will silently grow behind the scenes as it focuses on what it does best — selling groceries and making people hate Galen Weston.

(Seriously, why is that man so disliked? He seems fine to me. Oh, he made your groceries more expensive? Read this, it’ll help.)

Galen and the boys just have to sit back, relax, and let those profits roll in. Sure, the companies will continue to work together, but Loblaw has effectively maintained its banking presence while doing zero work. They’re mostly passive shareholders now.

Meanwhile, EQ Bank is going to take over these assets without the hinderance of worrying about a loyalty program. EQ is going to maximize the value of these customers by doing the things I mentioned above — cross-selling, offering promotions to attract more deposits, and I’d wager coming out with even better PC credit cards for potential customers.

And while they do that, PC Optimum should get stronger and stronger as more folks opt to do a portion of their everyday banking with a company that also gives them grocery deals at the same time.

The bottom line

The bottom line is this:

I like this deal for both Loblaw and EQ Bank, but I really like it for EQ Bank.

The company has struggled, and this deal will give just the pep it needs to get back into growth mode. The PC brand is a good one, and the long-term partnership will allow each company to do what they do best. Loblaw has signed an agreement saying it’ll hold shares for a minimum of four years, but I’d bet it ends up being longer. The Weston family are long-term thinkers, and it’s obvious they see the value in this partnership. Or else they wouldn’t be in it.

If we include a modest recovery in EQ’s business in fiscal 2026 and the addition of the PC Financial assets in 2027, I estimate that the new EQ Bank could surpass 2024’s profitability of $11.03 per share. Analysts are even more bullish; the consensus earnings target is $12.67 per share.

That puts the stock at between 8-9× 2027’s projected earnings, depending on how bullish you are. That makes EQB Canada’s cheapest bank stock, but also one of the fastest growing. That’s a nice combination.

In hindsight the best time to buy shares would’ve been before this deal was announced. But absent a time machine, that just isn’t possible. So, as they say about planting trees, if the best time was 20 years ago, the second-best time is now.