Adviser cautions to play it safe on Home Capital GICs

Let problems ‘sort themselves out’

TORONTO • The chairman of the board of the Registered Deposit Brokers Association is guiding clients away from putting money in Home Capital Group Inc.’s Guaranteed Investment Certificates (GICs) until the embattled mortgage lender’s problems “sort themselves out.”

Brian Evans, owner of Evans Financial Services in Uxbridge, Ont. and a registered deposit broker, said he would expect the association’s base, which has roughly 1,100 members across Canada, to also play it safe.

“If I had a client come in today with funds to invest, I might not consider using Home Trust at the moment until we see how things sort themselves out... Generally I wouldn’t use a company that’s in concern at the moment, if I can help it,” said the RDBA chairman.

Home Capital has been mired in liquidity problems and its shares have plummeted since the company and some of its current and former executives were accused by the Ontario Securities Commission on April 19 of misleading disclosure, alleging they knew there was fraud in its mortgage broker channel months before the company made public announcements about the problems in July 2015.

Home Capital has said the allegations are “without merit” and it will “vigorously defend” its approach to disclosure during the OSC proceedings, which began on Thursday.

Analysts warn that Home Capital’s viability hinges on the company’s ability to raise GIC deposits — a major source of funding for the mortgage lender. Home Trust Company is its principal subsidiary, which can receive deposits such as high interest savings accounts and GICs via brokers and financial planners, as well as through its direct-to-consumer channel Oaken Financial.

“We believe HCG’s ability to raise GIC deposits and maintain operations is uncertain,” said Stephen Boland, an analyst at GMP Securities, in a note to clients on Friday. “Without GIC funding, a run off scenario or sale/breakup is possible.”

Home Capital said last week it has retained RBC Capital Markets and BMO Capital Markets to “advise on further financing and strategic options.”

Home Capital obtains about 70 per cent of its funding from the deposit broker network, five per cent from institutional deposit notes, and the rest from its own Oaken branded direct-toconsumer savings accounts and GICs, according to Raymond James.

Since the allegations, which have not yet been proven, emerged, Home Capital has faced a partial run on its funding with clients withdrawing their money from high interest savings accounts at Home Trust. These balances — which have fallen from $1.4 billion on April 24 to $391 million on May 1 — help fund Home Capital’s mortgage lending.

This pushed Home Capital to seek a $2 billion credit line as an emergency backstop, but at costly terms that analysts pegged at an effective rate of 22.5 per cent for the first $1 billion (which it drew on earlier this week).

Home Capital’s total GIC deposit balances, including Oaken and broker GICs, have fallen slightly. Those balances stood at $12.86 billion on April 28, compared to $13.06 billion on March 28.

However, 52 per cent of those GICs are due to mature in one year, according to Mike Rizvanovic, an analyst with Veritas Investment Research in Toronto.

Last month, Home Capital said Bank of Nova Scotia briefly pulled Home Trust’s GICs from its offerings but intended to reinstate it that day, but with a $100,000 cap to match the upper limit of Canada Deposit Insurance Corp. coverage.

“Home Trust deposit products remain available through most leading Canadian financial institutions,” the mortgage lender said on April 24. “Some of these (including Scotiabank) have instituted a cap of $100,000 — the upper limit for Canada Deposit Insurance Corp. insurance,” Home Capital said.

Evans said he, and other deposit brokers, generally guide their clients to keep below the $100,000 CDIC threshold per institution, even before Home Capital’s liquidity issues.

Bill Ritchie, chief executive of one of the country’s bigger deposit brokers GICDirect.com, said his company hasn’t “felt any kind of panic from our clients to get out.”