Canada’s Royal Bank (CA:RY) came out as the winner in the latest round of the country’s Big Six bank earnings, reporting that third-quarter 2023 earnings per share increased by 8.8%, to $2.73 from $2.51 a year earlier. (All figures in Canadian dollars, unless otherwise specified.)

Including Royal, those Big Six posted decreases in EPS, at an average decline of 5.9%. Higher provision for credit losses (PCL) was the primary culprit in the July-3nd Q3 earnings reports.

According to The Globe and Mail, that’s right in the middle of analyst projections that earnings would fall between 4% and 7% in Q3 2023.

Among smaller banks, London, Ontario-based VersaBank (CA:VBNK) delivered a fine quarter of revenue and net income growth. Further, the digital bank didn’t have an issue with credit losses in the quarter.

If actual results matter, VersaBank remains the Canadian bank to beat.

As for investors, VBNK stock owners have seen the shares add 18.6% in the last 12 months; RY stock, meanwhile, is down about 0.1%. Across the board, though, the BMO Equal Weight Banks Index ETF (CA:ZEB) is down 3.7%.

Tale of Two Businesses

VersaBank’s business has quickly become a popular topic for Fintel coverage in 2023. Part of the allure is its two-pronged business model.

VersaBank has two revenue streams: Digital Banking, which accounted for 93% of its Q3 2023 revenue, and DRT Cyber (DRTC), a cybersecurity solutions provider for financial services companies. It accounts for the other 7%.

Most banks have two kinds of revenue: interest-bearing and fee-bearing. Net interest income is the difference between the money it makes off a loan portfolio and what it pays out for deposits, etc. Non-interest income includes asset management and financial advisory fees collected from customers.

VersaBank has both of these. However, its non-interest income is not generated from asset management-type business, but through the revenue DRTC collects from its customers for cybersecurity services.

In Q3 2023, the company’s Digital Banking unit generated $24.93 million in net interest income and $101,000 in non-interest income for a total revenue of $25.03 million, 24.7% higher than a year ago. The DRTC unit had revenue of $2.02 million, 67.5% higher year-over-year.

Those are both healthy growth rates.

Unfortunately, in the near term, DRTC is a drag on profits. Digital Banking had a pre-tax profit of $14.1 million in the latest quarter, 66.3% higher than last year. DRTC, however, had a pre-tax loss of $292,000, but 53.2% lower than a year ago. If the unit keeps up its top-line growth, it should break even sometime in fiscal 2024.

That reduces the pressure Digital Banking faces to keep growing the bottom line.

Credit Losses Provisions Boost Big

Of the Big Six, Canadian Imperial Bank of Commerce (CA:CM) and Bank of Nova Scotia (CA:BNS) had the most significant decreases in EPS profits in the third quarter, down 17.4% and 18.1%, respectively.

CIBC set aside $736 million in PCL in the third quarter, 203% higher than Q3 2022. Bank of Nova set aside $819 million, 99% higher than Q3 2022.

VersaBank’s Digital Banking had $171 million in PCL in the third quarter, 3%, or $5 million higher than Q3 2022. Any and all of the Big Six would take that kind of increase.

There’s a major reason for this lack of meaningful PCL increases.

At the end of July, the Digital Banking unit’s loan portfolio was $3.65 billion, up 7% sequentially from Q2 2023 and 30% YOY.

Of this amount, 76% were point-of-sale loans and leases in Canada and the U.S. They are installment loans provided to merchants’ customers at the time of a sale. Buy Now, Pay Later has become big business. When used correctly, it can be a good budgeting tool for consumers.

[Fellow contributor Josh Enomoto covered aspects of the BNPL business earlier this week in his analysis of Affirm Holdings (US:AFRM) here.]

While it’s become a significant provider of point-of-sale loans in Canada, Versa’s just getting going in the U.S. with its Receivable Purchase Program (RPP). On the Q3 2023 analyst call, management said that its U.S. RPP portfolio was US$67 million from three partners, with a fourth just signed.

U.S. Acquisition Pending

Once it acquires a U.S. bank — in regulatory proceedings to buy Minnesota-based Stearns Bank Holdingford — it expects this business to accelerate south of the border.

“This acquisition will be transformational for our bank, enabling us to broadly launch our unique and attractive financing solution to what remains an underserved market in the United States,” stated VersaBank CEO David Taylor during the firm’s Q3 2023 analyst call.

In the third quarter, the Digital Banking unit’s efficiency ratio — defined as non-interest expenses as a percentage of total revenue was 43%, considerably less than most North American banks. For example, Bank of Nova Scotia’s efficiency ratio in the third quarter was 56%, 13 percentage points higher.

VersaBank expects this percentage to move lower as it grows its loan portfolio.

It’s the Canadian bank to beat.

This article originally appeared on Fintel

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