Home Capital Advances on Lowered Capital Decision

Home Capital Group Inc., Canada’s largest alternative mortgage lender, gained the most on the Standard & Poor’s/TSX Financials Index after a regulator’s decision reduced the amount of loss-absorbing capital the bank has to hold against mortgages.

Home Capital climbed 2.2 percent to C$64 at 9:55 a.m. in Toronto, compared with a 0.4 percent decline in the 45-company index. Shares of the Toronto-based lender have advanced 8.4 percent this year.

The Office of the Superintendent of Financial Institutions issued a ruling after the market closed yesterday clarifying that lenders can exclude certain securitized mortgages from their asset-to-capital multiple calculations when they also sell a “strip” representing the refinancing risk associated with the loan. OSFI issued the ruling in response to questions from lenders over the issue.

Home Capital will “gradually increase its origination and securitization of insured residential mortgages and sales of retained interests in the securitized mortgage pools,” Chief Executive Officer Gerald Soloway said in a statement yesterday.

Home Capital, which provides mortgages for Canadians turned away from the banks, could “ramp up” its origination of certain loans, and possibly sell strips on existing loans to free up capital, Michael Goldberg, an analyst at Desjardins Securities Inc. in Toronto, said in a note to clients.

‘Positive Development’

“We view this as a positive development for Home,” Goldberg wrote. “We also view this as a positive development for the banks because it enhances their capital flexibility as well.”

About C$2 billion ($1.9 billion) of Home Capital’s securitized mortgages would be eligible for such treatment as of the end of 2012, Stephen Boland, an analyst at GMP Securities LP in Toronto, said today in a note. The lender’s asset-to-capital multiple would be reduced about 1.5 times if it were able to securitize the entire C$2 billion of applicable mortgages, he said.

“This would generate approximately $8 million of gains for HCG,” Boland said, assuming a 40 basis point margin on the sale of the assets. “Going forward, there may be additional gains for new mortgages.”

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