Home Capital investors brace for key meeting
Embattled mortgage lender Home Capital Group Inc. will face tough questions Thursday when it reports its first-quarter earnings, as its subsidiary’s demand deposits continue to fall and shareholders increased their holdings.
Canada’s biggest non-bank mortgage lender was originally due to release its latest results May 3, and pre-announced its earnings per share April 21 to reassure investors after the company and three of its current and former executives were accused by the Ontario Securities Commission of misleading disclosure.
That release, however, was postponed last week to allow Home Capital management to update for events that have occurred since the close of the first quarter.
Those events include a partial run on its funding, with its highinterest savings accounts expected to fall to $134 million by Wednesday, down eight per cent from a day earlier. Those balances, which help fund Home Capital’s mortgage lending, are down from $1.4 billion on April 24, and $1.991 billion on March 28.
In turn, Home Capital sought a $2-billion emergency credit line as a backstop, the terms of which the company said would have a “material impact on earnings, and would leave the Company unable to meet previously announced financial targets.”
Yet, despite Home Capital’s ongoing liquidity issues, shareholder Turtle Creek Asset Management boosted its stake in the Torontobased alternative mortgage lender last month to 12.2 million shares, or 19 per cent, Bloomberg reported Wednesday based on a filing.
Turtle Creek’s disclosure comes a day after it emerged that Canadian Imperial Bank of Commerce’s asset manager raised its holdings in Home Capital to 9.69 million shares, or 15.10 per cent, as of April 30, according to a regulatory filing.
Analysts don’t expect Home Capital’s pre-announced firstquarter earnings of $0.90 diluted earnings per share and $1.02 on an adjusted diluted earnings per share basis (compared to $0.92 and $0.96 a year ago) to change, as the company’s liquidity struggles and crisis of confidence occurred after the quarter ended on March 31.
“We expect the Q1 earnings call to help provide some colour on the way forward,” said Jeff Fenwick, an analyst with Cormark Securities, in a note Tuesday.
Analysts will also be looking for more details on Home Capital’s non-binding arrangement with an “independent third party” to buy or take on up to $1.5 billion of its mortgages coming due or for renewal in the coming weeks or already committed to, a move that analysts say bought the company some time.
A report in the Globe and Mail named the buyer as mortgage lender MCAP Corp. When reached via email, MCAP chief executive Derek Norton declined to comment.
If not for this non-binding agreement, Home Capital would have to fund these mortgages with its own liquidity and may have defaulted on a $325-million bond due on May 24, said Jaeme Gloyn, an analyst with National Bank Financial.
Company watchers will also be looking out for more details on Home Capital’s announcement Tuesday it is “tightening our lending criteria and reducing some of our broker incentive programs and expect that will result in a decline in our originations and renewals.”
On Wednesday, the chief executive of national mortgage and leasing company Dominion Lending Centres said his company had stopped recommending Home Capital’s mortgages to its clients “in order to best protect our customers and their investments” in light of recent developments, which it called “concerning.”
Shares of Home Capital were down more than five per cent in Wednesday morning trading, but closed roughly flat. Home Capital stock soared as much as 30 per cent on Tuesday after it announced the third-party agreement.