Home Capital CFO, ex-CEO to step down
Shakeup seen as ‘effort by the company to distance itself’ from fraud scandal
Home Capital Group Inc. moved Monday to further distance itself from allegations filed against it by the Ontario Securities Commission with an executive and board shuffle that will see two of the figures named by the securities watchdog leave their current roles.
However, analysts raised questions regarding the mortgage lender’s long-term viability after some financial institutions briefly stopped offering or capped the sales of Home Capital’s subsidiary’s deposit products in the wake of the allegations, potentially affecting a major source of its funding and hampering future growth.
Home Capital announced its founder and former chief executive Gerald Soloway would retire from the board of directors as soon as a suitable replacement is found, but would run for re-election at the May 11 annual general meeting. As well, chief financial officer Robert Morton will step aside after first-quarter results are filed next month, at which time its former CFO Robert Blowes will step into the role until the new CEO chooses a permanent replacement. Morton will be assigned new responsibilities for special projects outside the financial reporting group, the company said.
“These are important steps in rebuilding confidence and putting the focus back on our profitable underlying business and its solid performance,” Kevin Smith, chair of the board of Home Capital, said in a statement. “We know that we have not met the full expectations of some of our valued stakeholders, which we deeply regret.”
Last Wednesday, the OSC filed a statement of allegations against Home Capital, Soloway, Morton, and former president and chief executive Martin Reid, alleging that the company “misled” shareholders because it knew there was fraud in its broker channel months before making a public announcement in July 2015.
Reid was terminated from his role as CEO from Home Capital in March.
Shares of the alternative mortgage lender closed at $17.50 on Monday, down nine per cent from Friday’s close.
None of the allegations has been proven, and Smith has said Home Capital will “continue to vigorously defend our approach to disclosure” in the OSC proceeding, to be held on May 4.
Brenna Phelan, an analyst with Raymond James, told clients in a note Monday “we view the removal of these individuals from roles of active management and governance as an effort by the company to distance itself from these claims and demonstrate to investors that it is committed to implementing new leadership.”
Home Capital also said Monday that Bank of Nova Scotia had indicated it would resume sales of its Home Trust deposit products. Home Trust Company is Home Capital’s principal subsidiary and a federally regulated trust company, which can receive deposits via brokers and financial planners, as well as through its direct-to-consumer brand Oaken Financial.
“Home Trust deposit products remain available through most leading Canadian financial institutions. Some of these (including Scotiabank) have instituted a cap of $100,000 — the upper limit for Canada Deposit Insurance Corp. insurance,” Home Capital said.
A Scotiabank spokesperson confirmed to the Financial Post on Monday that it has put a $100,000 per-client cap on Home Capital’s deposit products.
Home Capital’s GICs were briefly removed from Scotiabank’s offerings on Friday, but restored on Monday morning, said GMP Securities analyst Stephen Boland. The sale of these broker GICs make up roughly 70 per cent of Home Capital’s non-securitized funding, he told clients in a note on Monday.
If Home Capital were to “lose access” to these channels “we believe liquidity risk may become a serious concern,” Boland said. “We see this as the first sign the broker fraud and related issues may materially impact operations.”