Home Capital beefs up loan-loss provisions
Profit dips as lender braces for possible defaults
Home Capital Group Inc.’ s first- quarter profit was hit by expectations more loans will turn sour as a result of the coronavirus pandemic’s effect on the economy, the alternative mortgage lender said Thursday.
Net income at Toronto- based Home Capital was $ 27.7 million for the three months ended March 31, down slightly from a year earlier — and by $9.5 million from the previous quarter — as rising revenue was offset by an increase in the amount of money the lender set aside for possible loan losses.
Total revenue was $ 127.2 million in the first quarter, up 22.5 per cent year- overyear, but provisions for credit losses were $ 30.2 million, an increase of 397.9 per cent from a year earlier.
In a note to clients, National Bank Financial analyst Jaeme Gloyn said Home Capital’s loan loss provisions “significantly exceeded” the consensus forecast of $ 5.8 million.
Cash set aside for bad loans is influenced by economic forecasts, which have considerably darkened since the end of 2019 because of the spread of COVID-19 and efforts to contain it. This led to an increase in the amount of money Home Capital put aside in the first quarter in case of loan losses on mortgages, credit cards and lines of credit. Commercial mortgages and other consumer retail loans accounted for most of the quarter’s provisions.
Borrowers have already been feeling the economic impacts of the pandemic, with Home Capital reporting it had deferred payments on 9,903 loans with a balance of $3.93 billion as of April 30.
Interest, however, is still accruing on those loans, payments on which were initially deferred for up to two months. The request for a payment deferral alone is not proof of significantly increased risk that a loan will not be repaid, Home Capital said in its filings, with officials noting they were relying on guidance from the federal banking regulator.
“We cannot know how long this period of self- isolation will last or forecast with certainty what the ultimate economic effects will be,” Home Capital chief executive Yousry Bissada said during a conference call with analysts and investors Thursday morning. “What we do know is that we’re here to help, and that we are very well-positioned to offer that help.”
Financial results for Home Capital in a period affected by the pandemic have come out ahead of those of Canada’s big banks, which are scheduled for later this month. Thursday’s results could, however, suggest what sort of pressure other Canadian lenders are under, particularly in Ontario, Home Capital’s main market.
Home Capital’s mortgage originations were $ 1.62 billion in the first quarter, roughly the same from the previous quarter and up from $1.22 billion a year earlier.
However, while residential real estate activity in January and February had been normal, as the quarter drew near its close and the reality of COVID-19 set in, sales activity in Home Capital’s major markets began to slow, chief financial officer Brad Kotush said.
“Typically, changes in transaction volume will take some time to flow through to changes in funding volumes, so it is logical to expect originations in the second quarter to decline from past levels,” he said.
According to the Toronto Regional Real Estate Board, home sales in the Greater Toronto Area were 67- per
expect originations in the second quarter to decline.
cent lower year- over- year in April, at 2,975, bogged down by social distancing and the outbreak’s economic effects.
Also looming over banks is the large number of customers needing to defer loan payments. More than 720,000 Canadians have deferred or skipped mortgage payments, according to figures from the Canadian Bankers Association.
Home Capital had a surge in deferral requests, and opted for initial payment deferrals of up to two months rather than the six months offered by the big banks.
Kotush said the lender was approaching the time when people who were granted initial deferrals may need to have them extended, and added that Home Capital will be tightening up the criteria for granting such relief. This could include asking for more explanation as to why the borrower needs more time.