Home Capital loss bigger than forecast — but says woes ‘resolved’

Alternative mortgage lender Home Capital Group Inc. reported a $111.1-million net loss in the second quarter as a liquidity crisis eroded its profitability — ending a stretch of quarterly gains that stretches back to at least 1999.

However, the company said the uncertainty that cast significant doubt on the company’s ability going forward had been “resolved.”

“There is no longer material uncertainty that casts significant doubt as to the ability of the Company to continue as a going concern,” Home Capital said in the management’s discussion and analysis section of its quarterly report. “In the coming months, the Company will reassess its business plan and set new strategic goals and objectives. In the interim, the Company is focused on returning its lending and deposit-taking activities to more normal levels.”

Canada’s biggest non-bank lender posted a diluted loss per share of $1.73 for the quarter ended June 30, compared to $0.99 earnings per share or $66.3 million in net income a year earlier. That’s more than the adjusted loss per share of $1.536, or an adjusted net loss of $66.45 million, expected by analysts surveyed by Bloomberg.

Home Capital had previously said its latest quarterly results would include increased expenses of $175 million, or $233 million pre-tax, stemming from its liquidity crisis. That included $130.6 million in commitment fees and transaction costs related to the $2 billion emergency credit line it needed as a backstop amid a partial run on its deposits. Those increased expenses also includes $7 million in costs related to the settlement of allegations of misleading disclosure by the Ontario Securities Commission and a related class-action lawsuit.

Renowned investor Warren Buffett in June stepped in with a whiteknight deal of up to $400-million equity investment and a cheaper $2-billion credit line, boosting confidence among depositors and investors and sending its share price up to $19.

Although the Toronto-based company has seen deposit inflows return to historical norms and paid down the $2-billion credit line in full last month, shares have come down from that bump. Home Capital’s stock closed at $13.77 in Toronto on Wednesday.

Analysts say the stock has been weighed down by concerns about slowing price appreciation in the Toronto-area housing market, rising interest rates, and proposed regulatory changes that could make it tougher for alternative mortgage lenders like Home Capital.

In its earnings release late Wednesday, Home Capital warned that the recently proposed regulatory changes by the Office of Superintendent of Financial Institutions, including a required qualifying stress test for uninsured mortgages, could have a material impact on its business. “If implemented as proposed, (it) would reduce, possibly materially, the size of the uninsured mortgage market available to the Company … The draft guideline would be expected to have a material impact on the Company’s business strategy going forward.”

The company will also focus on “strengthening its financial position and returning its lending and deposit-taking activities to a more normal level.”

“While deposit funding has grown in recent weeks, the Company has been paying a premium rate of interest on new deposits. These rates will reduce the interest spread earned on new business and the Company will look to reduce deposit interest rates to more sustainable levels in the coming months. This may have a dampening effect on deposit growth and consequently constrain growth of mortgage originations,” it said.

The company also said it will exit its payment card and payment processing (PsiGate) business and its prepaid card business.