Fitch Affirms Home Capital's IDRs at 'BBB/F2'; Outlook Remains Negative

  Fitch Affirms Home Capital's IDRs at 'BBB/F2'; Outlook Remains Negative

Business Wire

NEW YORK -- April 4, 2013

Fitch Ratings has affirmed the 'BBB/F2' long-term and short-term IDRs of Home
Capital Group Inc. (HCG). The Rating Outlook remains Negative. A complete list
of rating actions follows at the end of this release.

RATING ACTION RATIONALE

HCG's IDRs reflect its concentrated business mix, small size and funding
reliance on brokered time deposits. Ratings are supported by HCG's solid
performance, favorable track record and sound overall financial condition. The
Negative Outlook continues to stem from HCG's focus on the residential
mortgage business, which makes the company susceptible to possible future
pressure in the Canadian housing market.

KEY RATING DRIVERS - IDRs, VR and Senior Debt

The HCG's lending activities focus on the Canadian residential mortgage market
with the bulk of its activities in the Ontario market. The Canadian housing
market has generally remained healthy to date but is showing signs of slowing
down. High levels of consumer indebtedness and the risk of overvaluation in
the Canadian housing market are key macro concerns.

Mortgage portfolio quality remains sound, given the positive Canadian housing
market in recent years combined with the company's hands-on underwriting
process and deep knowledge of its home market. HCG focuses on mortgage
borrowers who do not qualify for prime loans offered by the major banks.
Typical clients consist of the self-employed, individuals with limited credit
histories, and newly arrived immigrants. HCG's business model relies chiefly
on residential mortgage brokers to source its customers. HCG uses relatively
high-cost brokered deposits for funding, reflecting its modest branch network.

HCG exhibits a significant reliance on relatively high-cost and potentially
more volatile brokered time deposits. These consist primarily of guaranteed
investment certificates (GICs) maturing from 30 days to five years. The
company uses these time deposits to match fund maturities of mortgage assets,
thereby keeping interest rate risk well controlled. Individual accounts are
generally maintained below $100,000 (the maximum deposit insurance protection)
and, thus, are viewed by Fitch as fairly stable as long as HCG's rates remain
attractive.

In 2012, HCG continued to report strong earnings, benefitting from stable net
interest margins, continued volume growth, low provisions for loan losses and
good operating efficiency. HCG well exceeds Basel III capital and liquidity
standards, but these capital and liquidity levels are considered necessary
given its narrow business focus and funding structure. The Tier 1 common ratio
stood at 16.1% as of year-end 2012. Fitch core capital (FCC) to risk weighted
assets (RWA) was 15.9% and FCC/Tangible Assets (excluding on balance sheet
securitizations) was 7%.

RATING SENSITIVITIES - IDRs, Senior Debt and VR

Positive rating momentum is unlikely due to geographic and product
concentration, as well as HCG's limited franchise and funding mix.

Deterioration in the overall housing market and/or adverse credit performance
within HCG's portfolio and/or a significant shift from HCG's core expertise in
residential mortgages toward higher yielding and potentially higher risk
commercial and personal lending products could result in a downgrade
particularly in the event of a significant decline in operating performance
and/or capital erosion.

More aggressive capital management (either as a percentage of RWA or tangible
assets) could result in rating pressure. This is considered unlikely as HCG is
anticipated to keep capital ratios well above regulatory minimums. Rating
pressure would ensue if HCG's ability to source cost effective funding is
compromised.

KEY RATING DRIVERS - Support and Support Rating Floors

HCG has a Support Rating of '5' and Support Rating Floor of 'NF'. Fitch
believes that HCG is not systemically important and therefore, the probability
of support is unlikely.

RATING SENSITIVITIES - Support and Support Rating Floors

Fitch does not anticipate changes to HCG's Support Ratings or Support Rating
Floors given Fitch's view that HCG will remain a non-systemically important
institution.

Headquartered in Toronto, HCG is primarily a residential mortgage lender, but
also offers other consumer lending and commercial real estate finance. HCG
conducts its activities through its federally regulated trust subsidiary Home
Trust Company (HTC).

Fitch has taken the following rating actions:

Home Capital Group, Inc.

--Long-term IDR affirmed at 'BBB';

--Senior Debt affirmed at 'BBB';

--Viability Rating affirmed at 'bbb';

--Short-term IDR affirmed at 'F2';

--Support affirmed at '5';

--Support Floor affirmed at 'NF'.

Home Trust Company

--Long-term IDR affirmed at 'BBB';

--Viability Rating affirmed at 'bbb';

--Short-term IDR affirmed at 'F2';

--Support affirmed at '5';

--Support Floor affirmed at 'NF'.

The Rating Outlook remains Negative.

Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Canadian Banks: 2012 Results and Performance Outlook' (Feb. 26, 2013);

--'2013 Outlook: Canadian Banks' (Nov. 14, 2012);

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).

Applicable Criteria and Related Research

Canadian Banks: 2012 Results and Performance Outlook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701845

2013 Outlook: Canadian Banks (Stable Outlook, But Household Debt Remains Key
Risk)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695110

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

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Contact:

Fitch Ratings
Primary Analyst
Joseph Scott, +1 212-908-0624
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Justin Fuller, CFA, +1 312-368-2057
Director
or
Committee Chairperson
Christopher Wolfe, +1 212-908-0771
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com
 
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