Home Capital Posts Lower Profit as Loan Growth Struggles--Update
November 15 2017 - 1:19PM
Dow Jones News
By Vipal Monga
Canadian mortgage lender Home Capital Group Inc. had trouble
shaking off the effects of a run on its deposits earlier this year,
paying a premium to entice depositors back to the firm amid
lower-than-expected loan growth during its third quarter.
The lender, which received an equity lifeline from Warren
Buffett's Berkshire Hathaway Inc. this summer, is one of Canada's
largest mortgage lenders to higher-risk borrowers.
"Moving forward, our priority is to restore growth in our
residential and commercial business lines," said Yousry Bissada,
the Toronto-based company's chief executive officer, during an
earnings call with analysts on Wednesday.
Home Capital reported net income during the third quarter of 30
million Canadian dollars ($23.53 million), less than half the
C$66.2 million it earned a year prior. Still, the results were much
better than the second quarter, when it lost C$111.1 million.
The company received an emergency credit line and a cash
infusion from Berkshire after 95% of its more than C$2 billion of
high-interest savings deposits fled amid allegations that the
company and three top executives misled investors about a mortgage
fraud problem. The company and executives struck settlements in
June to pay C$29.5 million to Canada's leading securities regulator
and shareholders belonging to a class-action lawsuit.
Berkshire in June agreed to indirectly acquire a 38.39% sake in
Home Capital, but shareholders in September voted down the plan for
the company to boost its holdings beyond an initial 19.99%
stake.
The company rebuilt its deposit base during the most recent
quarter to C$13.38 billion, up from C$13.10 billion three months
earlier. But deposits were still roughly 16% below C$15.89 billion
at the end of last year.
The lender had to pay higher-than-market rates to lure the
depositors and paid an average rate of 2.21% on its liabilities
during the third-quarter, up from the 1.91% rate a year ago.
Meanwhile, the company received average interest of 4.06% on its
assets, down from 4.25%, which squeezed net interest margins. Loan
orginations of C$385 million weren't enough to make up for more
than C$2 billion worth of loan sales. Orginations during the
quarter were roughly 85% lower than last year's C$2.54 billion.
While the company is trying to lend more to borrowers, the
impact of tougher lending standards set to take effect next year
could complicate those efforts, said Mr. Bissada, in an interview.
Borrowers may not be able to take out loans as large as they had
before, he said, but that could be offset by an increase in
immigrant and self-employed borrowers with limited credit
histories. Those borrowers have traditionally made up a large
percentage of Home Capital's customers. "None of us are sure" what
the effect of the new rules will be, said Mr. Bissada. "We'll need
the fullness of time to find out."
Mr. Bissada said Home Capital turned down roughly 70% of loan
requests during the quarter as the company brought in more
stringent underwriting rules and trained new employees. The
company's brush with regulators has caused it to become "more
rigorous" in the type of documentation it demands from borrowers,
pushing up the rejection rate. "We have a much tougher risk model,"
he said, in the interview.
Home Capital's shares rose 3.06% on the Toronto Stock Exchange
Wednesday afternoon. The stock traded at C$14.81 a share.
Write to Vipal Monga at vipal.monga@wsj.com
(END) Dow Jones Newswires
November 15, 2017 13:04 ET (18:04 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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