By JAMES BRADSHAW
Thursday, November 16, 2017
Recovering mortgage lender Home Capital Group Inc. returned to profitability in the third quarter but struggled to issue enough new home loans as it undertakes a rapid overhaul of its business.
The company originated $385-million in mortgages during the third quarter, a dramatic dip from $2.54billion a year earlier. But it is showing signs of stability in its deposit base, which suffered from a run of withdrawals in April over allegations the company had misled investors.
Home Capital had a busy, tumultuous fall trying to reshape its fortunes after a brush with insolvency. The firm recalibrated its rates, cut 65 fulltime jobs as part of a wider cost-cutting plan, and turned over its executive ranks. The changes were deemed necessary, but the persistent drum beat of weekly upheaval left it unprepared to take on as many new loans as investors might have hoped it would.
As the lender revamps its systems and trains new staff to process mortgages, it has been turning away more than 70 per cent of potential borrowers - either because they're deemed too risky or because Home Capital couldn't respond fast enough to win the customer's business.
"We have the financial resources to be very competitive in our market," chief executive officer Yousry Bissada said in an interview. "Now, we're focused on getting mortgage business and, talking to a lot of mortgage brokers; they are very supportive and have all said they will send more business here when we think we're ready."
Home Capital is once again renewing 75 per cent to 80 per cent of existing mortgages, consistent with precrisis levels, which should help steady its asset base. And it has adequate deposits to fund new loans, with $2.66-billion in liquid assets, plus another $2-billion in undrawn capacity on a line of credit from Berkshire Hathaway Inc.
Even so, executives predicted the total balance of single-family residential mortgages will dip to $10-billion at the end of 2017, from $10.4-billion at the end of the third quarter.
"[The] return to black ink is promising, but profitably growing the asset base is the key driver of the long-term turnaround," said National Bank Financial analyst Jaeme Gloyn, in a research note.
Home Capital has been working to reset its relations with mortgage brokers and respond to applications faster. The company also intends to build up its commercial mortgage business, while getting more aggressive in Quebec, B.C. and Alberta. The ultimate goal is to be the country's leading alternative mortgage lender.
"We were always No. 1," Mr. Bissada said. "We have a desire to get back there."
Yet, just as Home Capital looks to pick up speed, it faces new headwinds from federal regulations designed to cool housing markets.
Starting in January, the Office of the Superintendent of Financial Institutions will require applicants for uninsured mortgages to prove they could still make payments at a higher interest rate - the greater of the five-year benchmark rate published by the Bank of Canada, or the negotiated rate plus two percentage points.
As a result, some potential Home Capital customers will see their borrowing power shrink, which could put a further dent in its originations.
But the company hopes to offset some of that drag by serving borrowers who fail to qualify with larger lenders under the new stress test, including new immigrants and selfemployed workers. And it expects more existing customers will choose to renew with Home Capital rather than risk facing a tougher standard if they switch lenders.
"We're still unsure of the full impact," Mr. Bissada said.
Home Capital reported profit of $30-million, or 37 cents a share, for the quarter ended Sept. 30 compared with $66.2-million, or $1.01, a year earlier. (In the second quarter of 2017, it lost $111-million.) Revenue for the third quarter was $95.4-million, down from $145.1-million a year earlier.
Mr. Bissada promised to unveil a more detailed strategy in the second quarter of 2018, but he has already reshaped the lender's leadership in little more than three months. He hired Brad Kotush, formerly of Canaccord Genuity, as chief financial officer, and Ed Karthaus, formerly of D+H and Filogix, as head of sales; the search is on for a chief information officer.
Meanwhile, three other key executives left the company: strategy chief Greg Parker, head of residential lending Pino Decina and chief operating officer Chris Whyte.
"The future is bright for us," he said. "And we know that one, two, maybe three quarters is what it will take to convince the world, but internally we're feeling very confident."
In spite of the weaker results, Home Capital shares closed up 3.3 per cent on the Toronto Stock Exchange on Wednesday.
Home Capital (HCG)
Close: $14.85, up 48¢
Home Capital has had to turn away more than 70 per cent of potential borrowers - either because they're deemed too risky or because the firm couldn't respond fast enough to win the business.