EQB is buying PC Financial from Loblaw, positioning itself to grow despite rising risk of bad debt in its lending book and pressures on mid-sized lenders that have made it Canada’s last publicly traded challenger bank.

EQB will finance the $800 million deal by issuing shares to Loblaw, giving the grocer a 16 per cent stake in the company—with the option to eventually increase it to 25 per cent—and two board seats. The acquisition will increase EQB’s total assets by 11 per cent to $59 billion, quadruple its customer base to nearly 3.5 million and almost double its revenue, EQB CEO Chadwick Westlake said on a call with analysts Wednesday.

In an interview, EQB CEO Chadwick Westlake acknowledged there has been “a lot of change at EQB over the past year.” Westlake is about 100 days into the role, which he took on after his predecessor Andrew Moor died unexpectedly in June. Westlake has already undertaken a major cost-cutting exercise that included laying off about 169 workers, or eight per cent of its staff, and shifting resources to focus on the digital bank’s most profitable business lines.

Despite the challenging economy and turmoil at the bank, Westlake said he believes now is the right time to make a big move. He said he wants to capitalize on a shift in tone in Ottawa in favour of more competition in the financial sector.

“I have never felt a greater sense of a need by Canadians for better value, for more choice,” he told The Logic. “The time is right to do it.”

The two banks’ businesses complement each other well, Westlake said. PC Financial offers something EQ Bank lacked: Canada’s eighth-largest credit card business, tied to Loblaw’s PC Optimum rewards program. The acquisition will give the digital bank a branded physical presence and access to ATMs at stores countrywide. EQ Bank, meanwhile, has a tech-forward digital platform and an international payments partnership with Wise that PC Financial customers will gain access to.

EQB’s stock rose 13 per cent on Thursday, but reaction from analysts was mixed. “Ignore the credit losses, look an acquisition!” wrote Jefferies analyst John Aiken in a note—in bold, large type font. He pointed out impairments were up 6.8 per cent in the quarter, “with weakness almost across the board.”

In a note, TD Cowen analyst Graham Ryding said EQB is “taking on a sizable acquisition in a position of defence.” EQB is issuing shares “at a relatively depressed level” to pay for the deal, he said, noting growth of PC’s credit card business has been “muted” at two per cent annually over the last three years. It is paying 1.15 times book value, slightly higher than the 1.08 times multiple it paid for Concentra in 2022. 

On the same day it announced the acquisition, EQB also disclosed a $4.8-million fourth-quarter loss—a significant miss from the $34.1 million profit analysts had expected, according to Visible Alpha data—and revealed a 14 per cent year-over-year increase in the amount of money it set aside for bad loans from last year, to $54.6 million.

The U.S.-led global trade war has hit the Canadian economy hard, but the Big Six banks have continued to post profits thanks to strength in wealth management, capital markets and investment banking. EQB, Canada’s seventh-largest bank by assets, lacks those divisions to offset tough times. (It does have a subsidiary, ACM, that creates and manages pooled mortgage funds.) On a call with analysts on Thursday, Westlake said “wealth represents an important strategic gap we’re looking to close over time,” but that the bank plans to focus on integrating PC Financial first.

In addition to pressure from the better-resourced Big Six, Doug Macdonald, a consultant who advises mid-sized challenger banks and credit unions, said EQB also faces increasing competition from fintechs like Koho, Neo and UK-based Revolut, which recently hired a Canadian CEO. EQB is now the only publicly traded mid-sized challenger to the Big Six, following National Bank and Fairstone splitting up Laurentian Bank in separate acquisition deals earlier this week. 

Macdonald said “it’s very hard to play in the middle”—but the PC Financial acquisition puts EQB in a good position to try. He noted PC’s credit card portfolio makes EQB a significant player in the Canadian credit card business, ahead of National Bank and Capital One.

“There’s a growing hole in the market for a national alternative to the big banks,” Macdonald said. “If they can have a very solid execution and rollout of this with an exceptional digital service model, then they are in as good a position as anyone.”

Economist and financial consultant Andrew Spence said EQB’s success or failure carries significant stakes. The bank plays a vital role in the competitive landscape of Canadian financial services, he said. “It’s very important that you have an organization that has capital commitment and a high-profile commitment to demonstrating the value of competition,” he said. “We would miss them if they weren’t there.” 

While Loblaw isn’t one of the Big Six, it’s one of Canada’s largest and highest-profile companies—and has faced its share of criticism over alleged anti-competitive practices. Westlake said EQB and Loblaw agree on the importance of the bank’s role as an alternative to the Big Six; however, having their representatives on the board won’t change that.

“We have such a shared belief in Canada,” he said. “We have an aligned belief in bringing better competition.”