Home Capital downgraded amid uncertainty on future
Earning potential raised as concern even as lender’s deposit levels have ‘stabilized’
Home Capital Group Inc. has been downgraded by Macquarie Research despite a slowdown in the pace of withdrawals from deposit accounts at the alternative mortgage lender’s subsidiary.
Analysts Jason Bilodeau and Adarsh Iyer said Monday that while Home Capital has tangible asset value, there is much uncertainty surrounding its future earnings potential and the ability to realize this value “is in question and includes potentially realizing zero value.”
“We have been underwhelmed by delays/challenges in the company’s ability to secure permanent funding or to substantially monetize the company and this elevates our concerns,” the Macquarie analysts said in a note to clients in which they downgraded shares to neutral from outperform.
The Toronto-based mortgage lender has been facing a liquidity crisis, with deposit holders withdrawing more than $1.8 billion — or more than 90 per cent of the funds — from high-interest savings accounts at its subsidiary Home Trust since the end of March. The run on deposits followed executive departures and allegations of misleading disclosure by the Ontario Securities Commission.
Home Capital has said the allegations, in connection with the discovery of falsified information in its broker channel and the subsequent cutting of ties with 45 brokers, are “without merit.”
This rapid withdrawal of deposit balances forced Home Capital to obtain a $2-billion emergency credit line as a backstop last month, but at onerous terms that the company has said leaves it unable to meet previously announced financial targets.
Canada’s largest non-bank lender said in its first-quarter earnings release on Thursday that the recent hit to its reputation has impacted its future funding abilities and cast “significant doubt on the Company’s ability to continue as a going concern.”
Macquarie said in its note that it has “no credible basis on which to make detailed forecasts or estimates. The audit requirement to include the ‘going concern’ disclosure underscores just how limited the going forward visibility is within the company itself.”
Home Capital has said it is examining many options to stabilize the firm, including the sale of non-core assets such as certain portfolios to shore up its liquidity. It has drawn $1.4 billion on the facility so far.
“Actual company results and operating performance are likely to bear little resemblance to any present estimates as mgmt will be looking to monetize assets, restructure the company, and permanently change the business model in ways that have not yet been fully contemplated or articulated by mgmt,” Macquarie said.
However, the stopgap funding obtained by Home Capital “provides some breathing room,” the analysts added.
Home Capital has the option to refinance the $2-billion deal without penalties, and replacing the facility with less costly terms would be a “positive catalyst” for the company, Macquarie said.
With deposit withdrawals levelling off, Macquarie said it believed that Home Capital’s $1.6 billion in liquid assets could “provide the needed time for management to enact on their turnaround plan.”
Meanwhile, Home Capital said Monday that its deposit levels have “stabilized over the past few days” and its liquid assets now stand at $1.51 billion. Home Trust’s highinterest savings accounts balances were $125.4 million as of May 12, virtually flat from $125.5 million a day earlier, Home Capital said. That’s compared to roughly $1.991 billion on March 28.
Total guaranteed investment certificate (GIC) deposits, a major funding source for Home Capital’s mortgage lending, were $12.44 billion on May 12, down slightly from $12.49 billion a day earlier. That’s down from $13.06 billion on March 28. Home Capital also broke out figures for its cashable GICs — which holders can redeem before their maturity date — which stood at $167 million last Friday, down from $288 million on May 1.
Stephen Boland, an analyst with GMP Securities, estimates that Home Capital has enough liquidity to navigate a full drawdown of its high-interest savings account balances and repay a $325 million deposit note due on May 24.
“A sale of either the commercial mortgages or the prime business could add more,” Boland, which rates Home Capital at buy, told clients in a note on Monday. “We believe management is looking at both of these options.”