Home Capital Plunges Most Since 2008 as Originations Tumble

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Home Capital Group Inc. fell the most in almost seven years as preliminary second-quarter results missed analysts’ estimates and originations dropped after it cut ties with some brokers.

Shares in the Toronto-based alternative mortgage provider tumbled as much as 16 percent, the biggest decline since October 2008 and were down 15 percent to C$35.59 at 12:06 p.m. on Monday. Several banks cut ratings on the company’s stock, including Toronto-Dominion Bank and Royal Bank of Canada.

Home Capital said second-quarter profit will be C$1.03 (81 cents) a share when the company reports earnings on July 29, below the C$1.05 a share estimate by analysts surveyed by Bloomberg. Traditional mortgage originations fell 16 percent to C$1.29 billion in the second quarter, from a year ago. Insured single-family residential mortgages fell 55 percent to C$280 million.

“We are confident that the steps we have taken in the first half of 2015 were necessary to ensure the continued long-term profitability of our business, in spite of the short-term impact on originations,” Chief Executive Officer Gerald Soloway said in a statement Friday.

The drop in originations comes as the volume of home sales reach records in Vancouver and Toronto, Canada’s two most expensive real estate markets, and prices surge. The company’s reduced profit targets highlight the fierce competition for business amid low interest rates.

‘Reasonable Amount’

Home Capital is the fourth most-shorted Canadian stock, according to London-based Markit data analyzed by Bloomberg, with about 20 percent of Home Capital’s free float shorted.

Home Capital’s review of its business partners, disclosed in its first-quarter report, led the company to terminate relationships with some mortgage brokers, which caused an immediate drop in originations, the company said. Home Capital said in its first quarter statement it wanted to ensure the quality of product lined up with the firm’s “risk appetite.”

The brokers the company cut ties with predominately service Ontario and are longer-term partners who generated a “reasonable amount of business” for Home Capital, though they aren’t large national players, Martin Reid, president of the company, said by phone.

“If we’ve got a broker who’s just not living up to the standards we set, we’ll work with them and try to get it, but if they don’t we’re going to cut them off,” Reid said. “This time, it just happened to be a few more with a little bit more significant impact to the volume.”

Home Capital works with about 4,000 broker partners, Reid said. He declined to provide details on the number of brokers cut, citing the company’s so-called regulatory quiet period.

Keeping Targets

The company is keeping its midterm targets of 13 percent annual growth in diluted earnings per share, annual return on equity of at least 20 percent and as high as 26 percent dividend payout ratio, Reid said.

“We don’t think it’s a systemic problem and an ongoing problem,” he said. He added that if the Bank of Canada cuts its lending rate this week, Home Capital would follow with its own move to stay competitive with peers.

Four analysts downgraded their outlook for Home Capital with six of 10 analysts now rating it a hold, one saying sell and three buy. Before Home Capital released its projections Friday, six analysts rated it a buy and only four called to hold the stock with no sell rating.

Home Capital’s drop in business is specific to the company and not an early signal of rising losses, broader housing stress, or origination growth issues for other lenders, Geoffrey Kwan, an analyst at Royal Bank, said in a note to clients.

Originations Slow

“Long-term investors financially benefited from HCG’s successful growth,” he said. “But that success is making high growth more challenging, particularly given our view that industry mortgage loan growth will slow in the next 2-3 years.”

Home Capital, the largest mortgage provider outside of the country’s banks, with more than 64 million outstanding mortgages, may face increased pressure this year as the Bank of Canada is forecast to cut interest rates Wednesday. Lenders usually follow with their own prime rate cut, which can reduce pricing margins on mortgages.

Mortgage origination has slowed for lenders as consumers are tapped out with a near-record high level of debt of 163.3 percent of disposable income. High home prices are also keeping many buyers out of the market, despite rates at all time lows.

Toronto home sales rallied to a record for the third straight month in June as the average price for single family detached homes remained above C$1 million. In Vancouver, prices jumped 28 percent and luxury homes are now more commonly flipped as demand grows from local and foreign buyers.

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