Home Capital Maintains Stricter Lending Standards Despite Soaring Profits

Home Capital’s net interest margin improved to 2.61% from 2.38% a year ago.

Chris Helgren / Reuters

Mortgage lender Home Capital Group Inc. reported a sharp rise in first-quarter profits as fears of loan losses in the pandemic eased, but it maintained stricter lending standards for guard against the risks of booming housing markets.

Company profits rose 139 percent to $ 64.5 million in the first three months of this year, from the same period last year, and 19 percent from the fourth quarter of 2020. The main reason was the improved economic forecast, Home Capital recouped $ 12.1 million that had been set aside at the start of the pandemic to cover potential losses from delinquent loans, mainly for mortgages. commercial.

The company’s efforts to hedge against risk limited its ability to grow at a time of high mortgage demand amid rampant activity in the housing markets. Home Capital, which specializes in alternative mortgages for borrowers struggling to qualify with major banks, made $ 1.6 billion in new loans in the quarter, unchanged from a year ago a year. It issued 27 percent more residential mortgages, but that increase was offset by a 52 percent drop in new commercial mortgages.

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Indeed, Home Capital has consciously applied stricter lending standards since the start of the pandemic, reducing its appetite for risk and halting lending in parts of the country, according to chief executive Yousry Bissada. But it has also raised the question of whether Home Capital’s self-imposed withholding is costing it valuable business, as rival lenders take more of the business in busy markets.

“Management continues to be very cautious of the growing pandemic. With home prices rising rapidly, this had an even greater impact on their tolerance, ”said Stephen Boland, analyst at Raymond James, in a note to clients.

On a conference call Thursday, Mr. Boland asked company executives: “Are you missing a window here, in terms of restarting your growth?”

Restricted lending parameters are still in place, but are “under review,” Bissada said. And while some mortgage brokers would like the company to relax its standards sooner, most have remained “very loyal to Home.”

The company is closely monitoring vaccine distribution and key economic indicators such as unemployment, and “we are all seeing signs that the situation is improving,” he said. But he added that Home Capital would not revert to its normal lending parameters overnight: “We would be easier there.”

Home Capital is also planning to get rid of a back-up credit facility that has served as a safety net since the company’s near collapse in 2017. Home Capital initially took out an emergency loan of $ 2 billion. dollars from the Healthcare of Ontario Pension Plan, which he replaced with an expensive Berkshire Hathaway line of credit from Warren Buffett, then traded that for a smaller, cheaper facility from a syndicate of Canadian banks. Mr Bissada said Home Capital no longer needs the line of credit and will terminate it prematurely.

In the quarter ended March 31, Home Capital earned $ 1.24 per share, up from 52 cents a year ago. On an adjusted basis, the company said it was earning $ 1.26 per share, while analysts expected $ 1.04 on average, according to Refinitiv.

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Home Capital’s net interest margin – an important barometer of its profitability that measures the difference between interest earned on loans and paid on deposits – improved to 2.61%, from 2.38% a year ago. is one year old. Low interest rates have reduced the cost of attracting deposits to finance mortgages, Bissada said.

Investors are now waiting for the company to start deploying some of the excess capital it accumulated during the crisis. The first priority is to reinvest funds in the business, including improving technology and launching new applications for customers, Bissada said. But once the Canadian banking regulator lifts a moratorium on dividend increases and share buybacks, the company will also consider options to return money to shareholders.

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