Home Capital’s ‘Unique’ Woes Are Contained, Poloz Says

  • Central banker says the lender’s situation ‘idiosyncratic’
  • High housing prices remain concerns, he tells Globe and Mail

After Home Capital, Canada's Economy Suddenly Looks Frail

Bank of Canada Governor Stephen Poloz said Home Capital Group Inc.’s troubles are unique to the mortgage lender and there’s no evidence they’re spreading to other parts of the country’s financial system.

Home Capital’s situation is “idiosyncratic,” Poloz told the Globe & Mail in a weekend interview in Italy. His comments echoed Canadian Finance Minister Bill Morneau’s remarks in the newspaper a day earlier. Morneau said Home Capital’s risk has been contained and that financial checks and balances are working as they should. The mortgage lender said Monday that deposit levels have stabilized.

“The question would be: what caused this?” Poloz said. “Is it something unique to the institution itself or is it something in the system. I think this situation is pretty clear on that, it’s idiosyncratic.”

Home Capital shares rose 7.2 percent to C$9.65 at 9:33 a.m. in Toronto after jumping as much as 13 percent at the open.

Investors in Canada, where home prices jumped roughly 30 percent in the past year in its largest city of Toronto, have been anxiously watching Home Capital’s struggles in recent weeks. The company faced a run on deposits after Ontario’s securities regulator alleged it failed to properly disclose an internal probe into fraudulent mortgage applications. Executives warned May 12 that the reputational hit could threaten the firm’s viability.

The market still hasn’t cooled, with home prices climbing a further 5 percent in April from March, the Canadian Real Estate Association said in a new report Monday.

Read more: Home Capital warns of ‘knock-on effects’ if it fails

Home Capital said as of May 12 its high interest savings deposit balances stood at about C$125 million ($92 million), roughly the same as the day earlier, according to a statement on Monday. Available liquidity and credit capacity totaled about C$1.51 billion, including an undrawn C$600 million under the company’s C$2 billion credit facility.

GIC Flows

Home Capital’s GICs, or guaranteed income certificates, stood at C$12.44 billion, down from C$12.49 billion the previous day.

The company needs to attract GIC deposits to stay in business, GMP Capital Inc. analysts Stephen Boland and Mark Kearns said in a research note.

“HCG’s ability to continue as a going concern remains dependent on its ability to fund through broker GICs,” they said. “Without GIC funding, a run off scenario or sale/breakup is possible.”

The earlier comments from Poloz and Morneau, the two most powerful government officials in Canada’s financial system, solidify the government’s position that Home Capital doesn’t present a broader risk to the nation’s economy. Still, both stressed that high real estate prices, which have climbed sharply in past years, are among their primary concerns.

The potential for fallout if an economic downturn suddenly leaves Canadians unable to repay their mortgages is “a topic quite high on our list,’’ Poloz told the Globe and Mail on the sidelines of a Group of Seven meeting of finance chiefs in Bari, Italy. “In fact it’s at the top of our list.”

The central banker has called accelerating home values in Toronto and Vancouver unsustainable. Most of the growth in housing prices is based on market fundamentals, but there is still a “speculative element’’ in the market, he told the paper.

Politicians have tried to cool the market, with Ontario and British Columbia instituting a 15 percent tax on non-resident home buyers and the federal government tightening mortgage rules. 

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