The Impact of EQB's 4.70% Prime Lending Rate Cut on Emerging Market Equities

The recent 25-basis-point reduction by Equitable Bank (EQB) to a prime lending rate of 4.70%—its fourth cut in 2025—has sent ripples through Canadian financial markets and beyond. While the Bank of Canada's (BoC) benchmark prime rate remains at 4.95% as of July 2025Prime rate in Canada - Ratehub.ca^[5], EQB's aggressive rate cuts reflect a strategic recalibration to stimulate borrowing and investment. This move, however, is not confined to domestic implications. For value investors, it signals a potential inflection point in capital flows toward undervalued emerging market (EM) financial sectors, where historically low valuations and improving macroeconomic conditions are converging.

The Canadian Context: A Tale of Divergence

EQB's prime rate cuts—from 5.95% in December 2024 to 4.70% on September 17, 2025Equitable Bank reduces prime rate - Newswire^[1]—exemplify the growing divergence between central bank policy and commercial bank actions. The BoC's overnight rate, which indirectly sets the national prime rate, has remained anchored at 4.95% amid cautious optimism about inflation moderationPrime rate in Canada - Ratehub.ca^[5]. Yet, EQB's reductions, totaling 100 basis points in 2025, underscore its focus on market share growth and customer retention in a competitive banking landscape. By lowering borrowing costs for mortgages, HELOCs, and small business loans, EQB aims to spur domestic consumption and investment—a strategy that could indirectly fuel capital outflows to higher-growth markets.

The Global Spillover: Capital Flows and EM Financials

The link between Canadian rate cuts and emerging markets lies in the interplay of yield-seeking capital and sectoral valuation gaps. As EQB and other Canadian banks reduce lending rates, the return on domestic fixed-income assets diminishes, prompting investors to seek higher yields abroad. This dynamic aligns with broader trends: the U.S. Federal Reserve's rate cuts in 2024 and 2025What the Fed’s Rate Cut Means for Emerging Markets^[2] have already eased global liquidity, while EM equities trade at a 30% discount to developed markets, per Lombard OdierEmerging markets are poised to keep outperforming^[4].

For EM financial sectors, the implications are profound. Banks and insurers in markets like India, Brazil, and Southeast Asia trade at historic lows relative to book value and earnings multiplesEmerging markets are poised to keep outperforming^[4]. Lower Canadian rates reduce the opportunity cost of investing in these undervalued assets, particularly as EM central banks—such as India's Reserve Bank and Brazil's Central Bank—have also begun easing monetary policy to stimulate growthEquitable Bank reduces prime rate - MarketScreener.com^[3]. The result is a virtuous cycle: cheaper capital in advanced economies amplifies demand for EM equities, while EM rate cuts further enhance corporate profitability and investor sentiment.

Strategic Entry Points for Value Investors

The current environment presents a rare alignment of conditions for value investors. First, EM financials are trading at multi-year lows. The MSCI Emerging Markets Financials Index, for instance, is priced at 8.5x forward earnings, compared to 12.5x for its U.S. counterpartEmerging markets are poised to keep outperforming^[4]. Second, macroeconomic fundamentals are improving. China's property sector stabilization, India's fiscal stimulus, and Mexico's manufacturing boom are creating pockets of resilienceWhat the Fed’s Rate Cut Means for Emerging Markets^[2]. Third, the risk-rebalance narrative—driven by BoC and Fed easing—reduces the volatility that has historically plagued EM markets.

Investors should prioritize sectors with direct exposure to domestic consumption and credit expansion. Brazilian banks, for example, benefit from a 15% surge in retail lending and a 20% drop in non-performing loansEquitable Bank reduces prime rate - MarketScreener.com^[3]. Similarly, Southeast Asian insurers are capitalizing on a growing middle class and regulatory reforms that liberalize cross-border investmentsEmerging markets are poised to keep outperforming^[4]. For Canadian investors, EQB's rate cuts may serve as a proxy for global liquidity shifts: as domestic yields compress, EM financials become increasingly attractive as a hedge against currency depreciation and a source of alpha.

Conclusion: A Calculated Bet on Global Imbalances

EQB's 4.70% prime rate cut is more than a domestic policy adjustment—it is a harbinger of shifting capital flows in a post-high-rate world. For value investors, the challenge lies in balancing the risks of EM volatility with the rewards of undervalued sectors poised for re-rating. As the BoC and Fed continue their easing cycles, the window for strategic entry into EM financials is narrowing. The question is no longer whether to act, but how to act with precision.