Fitch Downgrades Home Capital's IDR 'BBB-'; Outlook Revised to Stable

  Fitch Downgrades Home Capital's IDR 'BBB-'; Outlook Revised to Stable

Business Wire

NEW YORK -- April 2, 2014

Fitch Ratings has downgraded Home Capital Group Inc.'s (HCG) and its
subsidiary, Home Trust Company's (HTC), long-term and short-term Issuer
Default Ratings (IDR) to 'BBB-/F3' from 'BBB/F2', respectively. With this
action, the Rating Outlook has been revised to Stable from Negative. A
complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS - IDRS, VRS AND SENIOR DEBT

Today's rating action reflects HCG's historic and projected rate of loan
growth; both of which have exceeded peer group medians and Fitch's
expectations. Fitch views HCG's growth cautiously given the company's
concentrated risk profile in the alternative single family mortgage space and
the moderate overvaluation in the Canadian housing market.

HCG primarily focuses on borrowers who do not qualify for prime mortgages
offered by larger Canadian banks. Typical clients consist of self-employed
individuals, small business owners, individuals with poor or limited credit
histories, and newly arrived immigrants. While credit performance for HCG has
remained strong over the last several years with net write-offs and
net-nonperforming loans totalling only 0.09% and 0.35% of gross loans,
respectively, as of year-end 2013, Fitch believes that should the Canadian
market begin to exhibit some signs of housing market weakness these credit
metrics could begin to deteriorate. Supporting this view is evidence that
loans made to these types of borrowers typically carry a higher risk of
default than mortgages insured by the Canadian Mortgage and Housing
Corporation (CMHC). Furthermore, potential credit deterioration of HCG's loan
portfolio is likely to weigh on the company's earnings and capital position,
both of which have historically supported the company's ratings.

HCG's earnings continue to be a relative strength for the company with returns
on average assets and shareholder's equity totalling 1.3% and 23.9%,
respectively, for 2013. However, the influence of earnings on HCG's ratings is
tempered in the context of the company's outsized growth, concentrated risk
position, and largely single product focus, which collectively have a higher
influence on the company's ratings.

Fitch notes that HCG's capital levels are well above required levels, with the
Tier 1 and total capital ratios totalling 16.80% and 19.69%, respectively, and
Fitch Core Capital (FCC) to risk weighted assets (RWA) totalling 16.76% at
year end. Fitch views HCG's favourable capital position as supportive to the
company's ratings and Stable Rating Outlook. However, given the company's
moderately higher risk profile than other Canadian bank peers, Fitch believes
that higher than peer group capital levels are also appropriate to absorb
potential losses.

While HCG's liquidity position improved over the last year, ratings continue
to be constrained by HCG's reliance on high-cost, brokered time deposits and
mortgage securitizations for funding. In particular, the brokered time
deposits would be expected to experience run off (or at least a relatively
higher funding cost) in a rising rate environment. HCG ending the year with
more than $1.4 billion in liquid assets following a $300 million institutional
deposit note issuance in late 2013. Fitch views HCG's level of liquidity as
sufficient considering the company's limited funding structure.

RATING SENSITIVITIES - IDRS, VRS AND SENIOR DEBT

Positive rating momentum is not viewed as likely in the near- to intermediate
term, due to geographic and product concentration, as well as HCG's monoline
business model and limited funding mix, all set against the backdrop of
elevated home prices and personal debt to income ratios within Canada.
Longer-term, positive rating momentum would be dependent on HCG's ability to
successfully manage the impact of a cooling Canadian housing market on asset
quality and earnings, along with the impact of an eventual rise in interest
rates on funding mix and costs. A measured and sustainable diversification of
business activities and migration to a more durable, deposit-funded funding
profile could also contribute to positive momentum.

Deterioration in the Canadian housing market and/or adverse credit performance
within HCG's portfolio could result in a downgrade, particularly in the event
of a significant decline in operating performance and/or capital erosion.

A shift away from HCG's core expertise into higher yielding and potentially
higher risk commercial and personal lending products would also be viewed
negatively. Moreover, rating pressure could also ensue if HCG's ability to
source cost effective funding is compromised.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

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 RATING AND SUPPORT RATING FLOOR

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.

Fitch takes the following rating actions:

Home Capital Group, Inc.

--Long-term IDR downgraded to 'BBB-' from 'BBB';

--Senior Debt downgraded to 'BBB-' from 'BBB';

--Viability Rating downgraded to 'bbb-' from 'bbb';

--Short-term IDR downgraded to 'F3' from 'F2';

--Support affirmed at '5';

--Support Floor affirmed at 'NF'.

Home Trust Company

--Long-term IDR downgraded to 'BBB-' from 'BBB';

--Viability Rating downgraded to 'bbb-' from 'bbb';

--Short-term IDR downgraded to 'F3' from 'F2';

--Support affirmed at '5';

--Support Floor affirmed at 'NF'.

The Rating Outlook has been revised to Stable from Negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Canadian Banks: 2013: Another Solid Year, But Consumer Risks Lurk' (Feb. 5,
2014);

--'2014 Outlook: Canadian Banks' (Nov. 25, 2013);

--'Global Financial Institutions Rating Criteria' (Jan. 31 2014);

--'Rating FI Subsidiaries and Holding Companies' (Jan. 31 2014).

Applicable Criteria and Related Research:

Canadian Banks: 2013: Another Solid Year, But Consumer Risks Lurk

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=731839

2014 Outlook: Canadian Banks (Stable Rating Outlook Balanced Against Negative
Sector Outlook)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723698

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826016

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Contact:

Fitch Ratings
Primary Analyst:
Ryan Doyle, +1-212-908-0771
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Justin Fuller, CFA, +1-312-368-2057
Senior Director
or
Committee Chairperson:
Nathan Flanders, +1-212-908-0771
Managing Director
or
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brian.bertsch@fitchratings.com
 
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