Home Capital Posts Lower Profit as Loan Growth Struggles--Update

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)

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